What are payment terms? Guide to getting paid for contractors

IT professionals are in a good place at the moment. Especially if they are freelance or contract, they are currently in high demand.

And so a lot of people with tech skills are capitalising on this by switching employment for contracting work. Tied to that, of course, if you do it right, you can earn good money.

But contracting as a limited company is different to being employed. One of the big differences is getting paid because you have to send out invoices, and to do that you need payment terms, writes Adam Home, senior credit manager at debt recovery firm Safe Collections.

What are Payment Terms?

Payment terms are the words you use to set out the terms for how you’ll get paid as a contractor,

Crucially, how and when you get paid is governed by the payment terms you set and get agreed.

Things are slightly different depending on whether you work through an agency or have a direct relationship with clients. This determines who you send your invoices to and who pays you.

But in both cases, you should carefully review your contract, paying particular attention to any payment terms before you commit to an engagement.

What should Payment Terms include?

Written correctly, payment terms provide a clear agreement between two parties on how remuneration will be handled.

Payment terms cover things like:

1. Agreed fees and charges (e.g. your hourly rate, or total fees for a completed project)
2. When invoices will be sent
3. How often invoices will be sent
4. What proof you will be required to provide (if any)
5. How the company /organisation being billed will pay
6. If the agency or intermediary is required to pay before receiving payment from the end-client (watch out for the opposite, so-called “pay when paid” clauses)
7. The timeframe for payment.

With Payment Terms, never assume they’ll be met

These last two points are crucial for contractors, especially if you are new to contracting and are familiar (until now) with receiving a regular monthly salary. To be a successful contractor, you absolutely cannot assume that every invoice you issue will be paid within 24 hours of sending it. They won’t be.

Similarly, do not assume an agency will pay you on presentation of an invoice. Any “pay when paid” clause linking payment of your invoice to payment by the end client simply passes the risk of non-payment from the agency to the contractor themselves.

Controlling when you get paid

The standard protocol in business is to agree a timescale for invoices to be paid. In most contractors' cases this will be outlined in the contract.

Remember, as a contractor, you are treated as a supplier by your client, not an employee. Invoices from all suppliers will (or should be) paid within an agreed timeframe.

The general default is 30 days, but it is not mandatory. The law in relation to late payment states only that any agreed period must not be “grossly unfair” to the supplier. As such, precedence is given to whatever terms are agreed between the supplier/contractor and their client, be that an agency, intermediary or as part of a direct relationship.

How long?! Extend Payment Terms explained

Many businesses, especially recruitment companies, will push for longer payment timeframes. The simple reason is that agencies want to hold onto their cash for as long as possible. In the case of some recruitment agencies, longer credit periods may reflect the extended terms agencies themselves often offer to end clients.

As a limited company contractor, you control your risk and you control your finances. So stand your ground on any request for terms over 30 days. If you can, negotiate for less. You ideally want to be paid as quickly as possible for the good of your own company’s cash flow. Firms that are happy to agree to shorter payment terms may be more reliable payers. And if they do prove unreliable, you will know you have a problem sooner with a seven, or 14-day payment term than you would with a 30 or 60-day term.

What this underlines is the importance of understanding the different payment terms at the outset of any new business relationship. If you don’t say anything, or go forward with your own terms, the client or agency will dictate how and when you get paid.

You will find this very hard to change after you have signed the agreement and started work. So make it a part of your initial discussions, and get what is agreed written into your contract.

(Quick) guide to getting paid as a contractor

We mentioned late payments. Sadly, virtually no contractor goes through their professional life without having to chase an overdue invoice from time to time. For some, it's a depressingly familiar part of their routine. But there are things you can do to minimise the chances of it happening. Start with including what will happen if a payment is late in your payment terms.

You are entitled in law to charge additional fees if a payment is late.

This entitlement applies the day after your agreed timescale for payment expires. If you didn’t agree a timeframe, the default is 30 days.

For each day the payment is overdue, you can add interest at 8% plus the Bank of England base rate - so currently 8.5%. You can also charge a one-off fixed penalty intended to cover debt recovery costs. This ranges from £40 to £100, depending on the size of the debt.

Additional tips to avoid being paid late

Making it clear, from the outset, that you will exercise your right to apply these charges in your payment terms is a good way to keep clients in line.

But ready some resources, because you also have to be ready to follow through with it!

To avoid having to call on those resources, make sure your invoices are submitted on time, and according to the agreed terms. Doing both minimises any room for quibbling.

Also, monitor payments carefully. Where they don’t come in, issue reminders courteously but promptly -- as soon as one becomes overdue. Be firm but fair, reminding clients of the payment terms they agreed and your statutory right to charge extra fees. Good luck contractors!