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There’s nothing more frustrating (and disappointing) than when you’ve done a great job for your client, and they won’t pay.
The good news though is that you’re not without options. There are a few things you can do before you start work to protect yourself from non-payment. If you’ve already completed the work, there are also options for recovering client debt.
Let’s talk it all through.
Before you start work for a client
Yes, you do need terms and conditions with your clients!
While it can feel tempting to do work on a handshake, disputes over whether work has been fully delivered, and whether you have the right to invoice, are all too common. It doesn’t have to be awkward to get your client’s agreement to your T&Cs. In fact, most clients will appreciate being asked, as T&Cs also protect their right to receive what has been promised, and help highlight any misunderstandings up-front.
How to agree T&Cs with your client
Depending on how you provide your services, you’ll choose between one set of T&Cs that apply to all your clients (you’d have these on your website or send them with your quote), or a tailored agreement for each client (for example, if each service is more bespoke).
With the one-for-all approach, you can obtain your clients’ agreement to these either by using an ‘I accept your Terms and Conditions’ tick box, or by including appropriate wording in your email or quote regarding the client’s acceptance. Or if you have a brick and mortar shopfront, you could have a copy of your returns policy and other terms on your counter for your customers to see.
If you go for the tailored option instead, it’s best to get the agreement signed by you and your client to show their acceptance.
Where your business sells products or services to consumers, the Consumer Guarantees Act 1993 is also likely to apply, but it is still useful to have your specific terms and conditions laid out in writing.
How do terms and conditions help me get paid?
Here are the two main ways by which having terms and conditions with your clients help you get paid (and the essential things to include):
1. T&Cs provide proof of what you’ve agreed
By clearly detailing the scope of work you’re performing for the client, there is much less room for debate on whether the work is complete. Think detail, detail, detail. Quantities, specifications, timelines, number of review rounds… the more you can include the better.
Then, make sure the point at which the client is required to pay you is crystal clear, eg, a deposit on agreeing the T&Cs and remaining payment on delivery. We recommend also including payment timing for invoices and late payment penalties.
Including these terms will make it much more likely your clients will pay you on time, and for those that don’t, will give you a clear right to demand payment. Also, If you end up needing to take action to recover debt by using a debt collector or taking legal action, you’re much more likely to succeed if you have written evidence of the client’s obligation to pay.
2. T&Cs allow you to structure payment terms to your advantage
If you don’t have T&Cs, you’re unlikely to get paid by your client until you’ve delivered the work. However, if you structure your payment terms in your T&Cs to protect your cash flow, you can help protect yourself against non-payment. Consider requiring a deposit, payment in advance, or milestone payments throughout the project.
After the work has been completed - recover your debt
If your payment terms don’t allow you to invoice until delivery of the work, make sure you send your invoice promptly following completion. If your client doesn’t pay in accordance with your T&Cs, and your polite nudges haven’t worked, there are a few options available to recover your money.
Sending a demand letter: when and how?
Before escalating to a debt collection agency or taking legal action, sending a letter demanding payment of debt can be an effective step in the debt recovery process. Here’s when and how to use this formal request for payment:
When to send a Demand Letter
You can send a demand letter after the payment due date has passed and the client has not responded to initial reminders, such as phone calls or emails. It’s often a final attempt to resolve the issue before taking legal action.
Content of the Demand Letter
The letter should state the amount owed, the basis for the debt, any applicable late fees or interest, and the deadline for payment. It should also outline the potential consequences if the debt remains unpaid, such as legal action or referral to a debt collection agency. Physical delivery (rather than email) to the address stated in the contract is best so that there’s proof of delivery.
Why send a Demand Letter?
The demand letter is evidence that you’ve formally requested payment. If the matter goes to court, the letter will demonstrate you giving the debtor the opportunity to settle the debt before pursuing legal action. Receiving a formal letter can also prompt your debtor into paying.
Engaging a debt collector
If the client still doesn’t pay after you’ve sent a demand letter, and you don’t want to jump straight into legal action, engaging a debt collector can be a useful next step.
If your T&Cs include a clause that allows for the recovery of debt collection costs, you can also pass any debt collection or legal costs on to your client. Without this, you will need to pay these costs.
Legal action
If your debt collector is unsuccessful or you want to pursue legal action, there are (again) a few options available:
- Disputes Tribunal – The tribunal can only be used where there is a dispute over whether the product or service has been delivered as promised, or the amount being charged is correct. The Tribunal doesn’t assist with debt recovery where there is no dispute (the client is just refusing to pay). The Tribunal can hear claims for up to $30,000. The hearings are run by a referee who will encourage the sides to reach an agreement before giving a binding decision. The fee to lodge an application ranges from $59 to $234 (depending on the debt amount disputed).
- Send a Statutory Demand Letter – If the debt is owed by a company and is not in dispute (just overdue) you can send a statutory demand letter in accordance with the requirements of s 289 of the Companies Act 1993, setting out the amount of the debt and requiring payment. The demand must be ‘served’ on the company (ideally in person). The debtor has 15 working days to reply. If they don’t, they are considered insolvent, giving the creditor a right to pursue an application for liquidation. As this is a serious consequence for the debtor, we recommend discussing this option with an insolvency lawyer before pursuing it.
- Take action in the District or High Court – you can take action in the District Court for a debt up to $350,000. In the High Court, action can be taken to recover a debt of any amount, however, as the costs of going are greater, it’s usually only used if the debt is more than $350,000. You will likely need a lawyer to advise you and help you through the court process, which makes taking a case to court a relatively expensive option.
Having robust and accepted T&Cs is the first step to protecting your right to be paid for your work. They should clearly state when your clients must pay, and ideally include penalties for late payment. If a payment is overdue and friendly reminders have been unsuccessful, a more formal letter demanding payment of debt can be an effective tool to encourage payment before considering debt collectors or legal action.
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We also file your annual tax returns, as part of the service. And on top of all this, our app has an invoicing feature that helps you create, send, and manage invoices. We even chase them up for you (politely of course), helping you get paid faster. No extra software required!
Whether you’re just starting out, or an industry veteran, Hnry is designed for all sole traders. We make sure that you never know the horror of an unpaid tax bill – ever. And that’s a big deal, believe us.
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