IT professionals are in a good place right now. Especially if they are freelancers or contractors, they are currently in high demand.
And so a lot of people with technical skills take advantage of that by changing jobs to contract work. Related to this, of course, if you do it right, you can make a lot of money.
But contracting as a limited liability company is different from being employed. One of the big differences is getting paid, because you need to send invoices and to do that you need payment terms, writes Adam Home, senior credit manager at debt collection company Safe Collections.
What are the payment terms?
Payment terms are the words you use to define payment terms as an entrepreneur,
Importantly, how and when you get paid is governed by the payment terms you set and agree to.
Things are slightly different depending on whether you work through an agency or have a direct relationship with clients. This determines who you send your invoices to and who pays you.
But in either case, you should carefully review your contract, paying particular attention to payment terms before committing to an engagement.
What should payment terms include?
Written properly, payment terms provide a clear agreement between two parties on how compensation will be handled.
Payment terms cover things like:
- Agreed fees and charges (for example, your hourly rate or total fees for a completed project)
- When invoices will be sent
- How often invoices will be sent
- What proof you will need to provide (if any)
- How the billed company/organization will pay
- If the agency or the intermediary is required to pay before having received payment from the end customer (pay attention to the contrary clauses called “payment when paid”)
- The payment deadline.
With payment terms, never assume they will be met
These last two points are crucial for contractors, especially if you are new to outsourcing and are used (until now) to receiving a regular monthly salary. To be a successful entrepreneur, you absolutely cannot assume that every invoice you issue will be paid within 24 hours of being issued. They won’t.
Also, don’t assume that an agency will pay you upon presentation of an invoice. Any “pay on pay” clause linking payment of your invoice to payment by the end customer only transfers the risk of non-payment from the agency to the contractor itself.
Control when you get paid
Standard protocol in business is to agree on a time frame for paying bills. In most cases of contractors, this will be described in the contract.
Remember that as a contractor, you are treated as a supplier by your customer, not an employee. Invoices from all suppliers will (or should be) paid within an agreed period.
The general default is 30 days, but it is not required. The Late Payments Act only states that any agreed delay must not be “manifestly unfair” to the supplier. As such, priority is given to the conditions agreed between the supplier/contractor and his client, whether it is an agency, an intermediary or within the framework of a direct relationship.
How long?! Extend Payment Terms Explained
Many companies, especially staffing companies, will push for longer payment terms. The simple reason is that agencies want to keep their money for as long as possible. In the case of some staffing agencies, longer credit periods may reflect the extended terms that the agencies themselves often offer to end customers.
As a public limited company entrepreneur, you control your risk and you control your finances. So stand firm on any request for more than 30 days. If you can, negotiate cheaper. Ideally, you want to get paid as quickly as possible for the sake of your own business cash flow. Businesses that are happy to accept shorter payment terms can be more reliable payers. And if they prove to be unreliable, you’ll know you’re in trouble sooner with a seven or 14 day payment term than with a 30 or 60 day payment term.
This highlights the importance of understanding the different payment terms from the start of any new business relationship. If you say nothing or agree to your own terms, the client or agency will dictate how and when you get paid.
You will find this very difficult to change after you sign the agreement and start working. So make it part of your initial discussions and have what is agreed in your contract written down.
(Quick) guide to getting paid as an entrepreneur
We mentioned late payments. Unfortunately, hardly any entrepreneur goes through their professional life without having to chase after an overdue invoice from time to time. For some, it’s a sadly familiar part of their routine. But there are things you can do to minimize the chances of this happening. Start by including what will happen if a payment is late in your payment terms.
By law, you have the right to charge additional fees for late payment.
This right applies the day after your agreed payment term has expired. If you haven’t agreed on a time frame, the default is 30 days.
For each day you are late paying, you can add interest at 8% plus the Bank of England base rate, which is currently 8.5%. You can also charge a one-time fixed penalty to cover collection costs. This ranges from £40 to £100, depending on the size of the debt.
Additional Tips to Avoid Getting Paid Late
Making it clear from the start that you will exercise your right to apply these fees in your payment terms is a good way to keep customers in line.
But prepare some resources, because you must be ready to follow through on them too!
To avoid having to rely on these resources, ensure that your invoices are submitted on time and according to the agreed terms. Doing both minimizes any wiggle room.
Also, watch payments carefully. Where they don’t come, issue reminders courteously but quickly – as soon as one is late. Be firm but fair, remind customers of the payment terms they agreed to and your legal right to charge additional fees. Good luck entrepreneurs!