Many small businesses are caught out when clients refuse to pay their invoices. For a small startup, a handful of unpaid invoices can make the difference between a healthy bank balance and a full-on cash flow crisis.
When your non-paying client is located outside of the UK, unpaid invoices become even more of a headache. Chasing the debt yourself might be expensive, impractical and fruitless. If you’ve researched debt collection online, you’ll probably have noticed that there’s plenty of self-help when your client is in the UK - but if they’re overseas, there’s very little official advice on what you should do.
Luckily, many debts racked up by overseas clients are recoverable, as I found out when I asked Safe Collections to chase a European debtor on my behalf. They were able to work with affiliates to successfully recover the money we were owed, even though it wasn’t a massive amount of money.
If you’re in the same boat, here’s what you need to know.
EU Law and Debts
In many cases, you have certain rights to compensation if your customer doesn’t pay their invoices within a reasonable time.
The UK legislation is called the Late Payment of Commercial Debts Act and is fairly well-known. However, many entrepreneurs don’t realise that they have rights under EU law as well.
- If your client is in the UK, you can charge interest and penalties. For small invoices, the law allows you to append a £40 fixed fee plus a certain amount of interest.
- If your client is in the EU, similar rules apply. Under Directive 2000/35/EC, businesses can charge interest on unpaid debts if both parties are in the EU. In March 2013, this legislation will be replaced by Directive 2011/7/EU; businesses will be allowed to charge a fixed late fee of €40 plus interest.
Debts Outside the EU
Many collection companies can also chase debts when clients are outside the EU, although you don’t have the same right to charge interest and fees.
Nonetheless, it’s still worth pursuing debts from clients outside the EU, since many companies have solid relationships with agencies abroad who can put pressure on your client to pay. In some cases they can take the matter to court, if you want to go ahead with legal action.
Pursuing overseas debts is more difficult, but it’s not impossible. If nothing else, taking action shows your client that you’re not a soft touch and you’re serious about being paid for your time.
Preventing Future Problems
When it comes to cash flow, you’ll be in a more powerful position if you anticipate problems before they occur.
For small businesses, this means toughening up payment terms, particularly when clients are based overseas.
Here are a few ideas.
- Set a minimum credit limit. You might have decided on the maximum balance you’ll let a customer run up, but have you set a minimum? Don’t let clients run up tiny invoices that you can’t chase affordably. (Adam at Safe Collections suggested this tip - it works well for us!)
- Get clients to agree to a contract. Specifying your payment terms in black and white puts you in a more powerful position if your client refuses to pay.
- Ask for payment in advance. You might want to do this the first time you work with a client, or arrange an ongoing advance payment schedule.
- Get a deposit. Deposits are a great screening technique; if a client won’t pay you to secure your time, they probably won’t want to pay you once you’ve completed the work either.
- Withhold copyright. I notify all of my clients that they only get copyright for content once they’ve paid for it. That gives me the power to get content removed when it isn’t paid for; if their server is located in the US, I can use a DMCA takedown notice, for example. This tactic would also work well for web designers, photographers and designers.
Depending on the nature of your business and the products or services you provide, some of these strategies may not work for you. However, there’s almost certainly something you can do to shore up your defences and curb late payment from overseas clients in future.
If you find yourself in a situation where an overseas client owes you money, it’s always worth seeking the advice of a collections company before writing that money off as a bad debt. With the expertise of a professional, and the power of the law, getting paid might be easier than you ever expected.