One of the most empowering things about being a freelancer is being able to set your own rates and decide when and how you want to be paid.
Setting clear and realistic payment terms and conditions minimises the risk of delayed payments and helps build stronger client relationships.
Delayed payments are a real issue, as recent research published by IPSE shows that almost a third (32%) of UK freelancers experienced payment delays from clients in the 12 months leading up to the survey.
Separate GOV.UK research also explored the ever-present late payment problem and found that businesses attributed paying invoices late to:
- Admin errors (36%)
- Disputed invoices (31%)
- Technical issues (23%)
- Paying late on purpose (1%)
Unsurprisingly, the businesses surveyed didn’t admit to factors such as poor payment habits or cash flow issues being the reason for outstanding invoices – but it’s likely these are also factors in play.
Reducing instances of late payments is one of the key benefits of setting client payment terms. We’ll explore the methods of implementing payment terms and possible late penalties in this blog post.
What are payment terms?
Payment terms cover the agreed arrangement between you and a client regarding when and how they will pay you for your services.
The most common ways payment terms are set up between a freelancer and their client are:
- Upfront: You are paid the full amount before the project begins
- Deposit: The client pays a deposit before the work starts and the rest after the job is done
- Fixed price/project rate: You and the client agree on a set budget for the work
- Daily or hourly: You are paid based on the hours or days you work, calculated using your daily or hourly rate of pay
- Milestone payments: You are paid at various phases of the project’s completion
- Retainer: The client pays you a fixed fee at regular intervals, usually monthly
When should I set the payment due date?
It’s completely up to you – GOV.UK’s research found that the two most common payment terms among micro-businesses were 30 days (54%) and 7 days (22%) after invoicing.
These are typically calendar days, not working days, but you can confirm and outline this for your clients on your invoice and freelancer contract. You might be happy to exclude Bank Holidays from the terms, for example.
What payment methods should I allow?
How you’d like your clients to pay is your choice. If you only want to offer one way to pay, that’s your call to make.
Giving your client’s options when it comes to payment methods can be an effective way to speed up the process though and reduce the risk of your payment being delayed.
Popular payment methods include:
- Bank transfer
- PayPal (or other peer-to-peer payment networks)
- Directly through built-in payment systems on freelancer marketplaces (e.g. Upwork and Fiverr)
- Cheque
Can freelancers set client payment terms?
Yes, freelancers are allowed to set their own payment terms. This means they can tell clients when and how they prefer to be paid. This includes pre-project deposits and full payment on completion.
Not only are freelancers allowed to set payment terms, but it’s also a recommended practice to support good admin and bookkeeping habits as well as healthy cash flow.
Can I charge late fees if a client doesn’t pay me?
Yes – under late payment rules and regulations, you are allowed to charge penalties for missed payment deadlines as a fixed sum, plus statutory interest of 8% and the Bank of England base rate. Late payment rates are currently set at:
- £40 – debts of £999.99 or less
- £70 – debts of £1,000 – £9,999.99
- £100 – debts of £10,000 or more
Note: you’re only allowed to charge the business once for each late payment. You can’t stack penalties. Check out the government’s free calculator for penalties and statutory interest on unpaid invoices.
What’s classed as a ‘late’ payment?
If you have a date specified on your payment agreement, anything after this is classed as late. If you haven’t though, don’t worry.
The payment will then be classed as late 30 days after your customer gets the invoice, or after you’ve provided the service (or delivered the goods if this came later).
Deciding what payment terms to set
You’re in control when it comes to deciding what payment due dates to set and which payment methods to offer. These might even vary depending on the client or project. When making these decisions, it’s important to consider:
- Your cash flow – For example, if your cash flow isn’t in the healthiest position, you might want to opt for the shorter 7-day payment turnaround, so you aren’t waiting as long for your funds.
- A client’s payment habits – If one of your clients is notoriously bad at paying their invoices on time, shorter payment terms can be an effective way of encouraging faster payment. It also means you can implement late payment repercussions sooner if necessary.
To build strong client relationships, we’d recommend agreeing on payment terms with your client together.
You can, of course, stand your ground if you’re not happy but treating these terms as a two-way street is a great way to show you are considering your clients’ needs as well as your own.
How to communicate payment terms to clients
You can simply add your payment terms to your freelancer contract at the bottom of your invoice document, including details about late payment penalties. However, for better client relationship management, follow these steps:
- 1. Agree on payment terms and methods with your client before sending over your contract and get it in writing (e.g. email or Slack message).
- 2. Add the agreed payment terms to your contract, which both you and your client should sign.
- 3. Add your payment terms to the bottom of your invoice document as a reminder. This will help the finance team or whoever is releasing payment to know when to schedule it.
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