Whether it’s clients “forgetting” to pay, stalling for time to get the money to settle their bill - or sometimes just deciding not to pay you at all - having to chase up money that’s rightfully yours is frustrating beyond belief.
But how can you influence something that seems to be out of your control? Here in FreeAgent's Data Lab we investigated the effects of different invoicing terms on payment times and the results came as quite a surprise. If you usually give clients 30 days to pay, our data shows that some clever tweaks to your terms could make you three times more likely to be paid within a week!
The late payment struggle is real - you’re not alone!
The problem of late payment is more widespread than you might think - the UK government estimates that small firms are currently owed around £26bn in late payments, while the process of chasing debts costs these businesses millions of pounds more. Last year we carried out a poll with YouGov that found almost one in four (23%) small business owners had waited at least six months after their payment deadline to be paid by a client.
FreeAgent also recently carried out some research among UK web designers and developers and discovered that a staggering 97% has had to deal with a late payer at one point or another. Many said that they even had to write off thousands of pounds due to not being paid at all by a client!
How many invoices are actually paid on time?
In this research, we wanted to find out if there was anything that freelancers and small businesses could actively do in order to get paid more quickly. Time to delve into the data!
We started by looking at FreeAgent invoices from 2015 with different common payment terms (30-, 14-, seven- and zero-days) and comparing how often these invoices were paid “on time” (meaning before the invoice term expires).
Here’s what we found:
So the longer the terms, the more chance of being paid within these time periods. Kind of makes sense, right? But wait - how many days did it actually take for these invoices to be paid?
Zero-day invoicing terms get the quickest results!
Judging from the graph above, it looks like the most effective way to be paid on time is to have a 30-day payment period. But when we looked specifically at how many of these 30-day invoices were actually paid in less than seven days of being issued, the results were surprising:
In other words, if you tell your client to pay you immediately you’re more than three times as likely to be paid within a week than if you use 30-day terms!
Cut your invoice terms and the hassle of chasing payment
So, while setting longer terms may mean you’re more likely to be paid “on time”, if you’re actually looking to get the money you’re owed quickly, it turns out that setting either a seven-day or a “pay immediately” zero-day term could work much better for you.
Our results show that with shorter terms, you’re more likely to get the cash owed to you within a week and will be less likely to have to worry about chasing up outstanding invoices - we’ve all got better things to do!
Fiona Christie became FreeAgent’s second data scientist, having graduated from the University of Glasgow in mathematics and statistics, including a year's placement at the University of California Davis. Fiona primarily works on applying her statistical knowledge to understanding customer behaviour.