How to get paid on time
Cash may not be king anymore, but cashflow certainly is. Bills only get paid if the money keeps coming in. And tough times are made even tougher by clients who are bad payers.
Generally, these fall into three categories:
- Late payers, who pay outside of the agreed terms.
- Clients who force agencies to accept 90- or even 120-day terms.
- Operators who twist an agency’s arm to take a pay cut after the work is completed.
From conversations with design studios, most people’s experience is that late payment is rarely due to malice.
More typically, smaller clients are just disorganised, and with bigger clients, it’s easy to get lost in their systems, particularly if they’ve been outsourced.
“Most clients want to pay, it’s normally process issues,” says Jemma Golby, finance director at London branding agency, Bloom.
Regardless of intent, Bloom runs credit checks on new clients before agreeing to work with them. And regardless of who they are – even if it’s a bit of work for your brother-in-law – always draw up a contract.
Then it’s about invoicing. First up, put a communication process in place around invoicing that you can stick to, says Design Business Association membership director, Adam Fennelow.
“The process starts just after you agree to a programme of work with the client. As part of early discussions, you need to agree on payment terms, as well as the monetary amount.
“This is negotiable – don’t just agree to the client’s standard terms. You need to agree if you are invoicing in advance, or in arrears, or a mixture, and whether you require payment within 14, 30, 60 days.”
In extreme cases, Huddersfield brand agency The Engine Room reduces its terms for new customers to seven days.
Fennelow also points out that you can add penalties for late payment into your terms and conditions.
“These can really help if there is a problem later,” he explains. “It’s all part of the back and forth of negotiation – don’t just ignore it then find out the client pays on 120 days. Actively negotiating the point raises the awareness of the issue with the client. Then they know when they are expected to pay.”
Clarity and communication
Without this clarity, months can go by before you know there’s a problem with your invoice.
Every client’s got a slightly different internal journey to process payments, and some clients can be vague about it. Ideally, they should give agencies a document, showing how they like invoices to be presented.
Bloom sends new clients a form to fill in, with details including who to send invoices to, and who to contact if there’s a problem.
“It prevents us having to work out those steps along the way. In the past we’ve discovered that information once things go wrong,” Golby says.
Also, if a purchase order (PO) is needed, what is their process for approval? Fennelow points out that sometimes a quote is required first in order to get the PO approved.
This sort of upfront preparation can be particularly admin-heavy with overseas clients. In countries like India, Russia, and some parts of Southeast Asia, complicated hard copy paperwork is still mandatory for international payments.
“There are often significant challenges in understanding exactly what is required and when,” Golby says.
The more communication with the finance and procurement teams you are dealing with, the better.
“When you send the invoice, ask for confirmation it has been received, and that everything is OK, and it has been accepted,” Fennelow says. “A mistake on the invoice could lead to it being rejected, but you might not be made aware of that until it becomes overdue.”
It’s also sensible to ask what date that payment will be made. A week before the due date, check in to make sure they will keep to the agreed schedule, Fennelow suggests.
“Our accounting software is set up to send reminders in a human voice. It’s automated and prompt,” says Dr Graeme Heyes, director of sustainable innovation at Litmus Sustainability and founder of the Manchester Doughnut Economics community.
“Relentless persistence is very effective.”
If the payment date comes and goes, with nothing arriving in your bank account, get on to the client immediately.
“Remind them that work cannot continue – or work cannot be handed over– if payments are overdue and that late payment penalties kick in,” says Fennelow. “You might not have to charge extra but it’s a useful negotiating tactic.”
“If there’s a problem, keep knocking on the door,” Golby says. “Relentless persistence is very effective.”
If you are concerned that you won’t get paid, stop all work. It’s your most important bargaining chip in the negotiation. A number of agencies say they’ve had to do this on occasion.
If you’ve staggered your invoice, for example asking for 50% up front, or invoicing in instalments, you’re partly protected.
“If there’s a real delay in invoice, you can cut off work,” says Darren Evans, The Engine Room founder and Design Council expert.
What can you do if someone won’t pay?
If payment still isn’t forthcoming, what are your options?
You could try to include a clause in the contract that says your intellectual property doesn’t pass to the client until you’ve received payment.
“I try to get that into a contract when I can,” says Golby. “The big multinationals normally say no, but they’re the less risky payers.”
Or you could go for the softly-softly approach. “We try to think with empathy,” says Heyes. “If they don’t pay on time, try and understand what challenges they might have. Tell them, ‘We’re a small and growing business and cash-flow’s really important to us.’
“That can be the trigger to make it happen. It acts as a polite nudge.”
Even healthy agencies, who have the confidence to be firm with clients, have had bad experiences. Agencies or sole traders who are struggling are at greater risk of being taken advantage of.
“If people know you’re desperate, you’re automatically on the back foot,” says an anonymous designer.
Picture the scene – you’re appointed to do a big project and you deliver it as request. But rather than paying your invoice, the client demands a 20% discount, dangling more potential work down the line.
Hopefully this is just a bad dream for a lot of agency leaders, but for one unnamed boss it was reality. In the end, he and the client came to a “compromise” which meant while he could just about afford to pay his staff, he went without.
“It’s like dealing with Trump,” says the anonymous designer, who has also fallen victim to this sort of sharp practice.
In his experience, it’s difficult to kick up a fuss or walk away when payment is delayed.
“You don’t down tools, because you’re desperate,” they say. “It’s about whether you can pay the mortgage or not.”
For bigger businesses, that should be an option. At The Engine Room, “We approach any business situation with ‘You have to be prepared to walk away.’ That’s better than being taken for a ride,” Evans says.
There seems to be a growing trend to name and shame bad payers on platforms like LinkedIn. And as a last resort, there’s always the threat of the small claims court.
For the time this all takes, forewarned is forearmed, says Golby.
“When we started spending half a day once a month on credit control checking, we were catching problems earlier which were easier to unpick.”