Credit control for freelancers
Matt Perkins
In my career as a business adviser, I’ve worked with hundreds of freelancers to help them manage their businesses, understand their finances and grow their revenue. One of the recurring issues I’ve encountered over the years is that freelancers often don’t have a credit control process set up, or are reluctant to enforce a robust credit control process in their business.
Credit control seems to be one of the most dreaded and misunderstood responsibilities of a business owner. Most people focus on the money collection aspect of it, but it is so much more extensive than that.
In reality, credit control is:
As a freelancer, your time is your credit. Every time you complete work for a client without being paid upfront, you are extending credit to that client. Getting into this mindset will help you think about how much credit you want to extend to each client - after all, you can only charge for your time once. Implementing a good credit control process will help you minimise the risk of damaging your business by extending credit to the wrong customers, and help you take advantage of extending credit to good customers.
Here’s an overview of how to implement a credit control process in your business.
Check your client’s credit
We all have friends that we don’t lend money to because you know you’re unlikely to see it for a while (or never), right? Clients are no different. Even if you have a good contract in place, it is futile agreeing terms and payment schedules if your client is not creditworthy.
If possible, try to do some basic credit checks on your potential clients, using services that provide basic information for free. If you are entering into a large contract it may be worth paying for more in-depth reports to make sure you are not overexposing yourself to an unreliable payer.
You shouldn’t just check new customers either - things can change quickly in business, so you should regularly (at least once a quarter) check your existing customers to spot early signs of difficulties. Hopefully, that will help ensure that you don’t get unwittingly dragged down by a struggling client.
Set credit limits and stick to them
Once you have a good understanding of a client’s creditworthiness, you can decide how much credit you’re comfortable extending to them. For a freelancer, that means deciding how much time you’re willing to work for the client without payment. For some clients you may agree to invoice fortnightly or even monthly for your work, and for others you may require payment in advance for any work completed.
Just because a client has a less than impressive credit rating doesn’t mean you can’t deal with them at all. As well as requiring payment upfront or at smaller intervals, you might also want to consider investigating credit insurance (at the client’s expense) although this can be a costly way to do it.
Once you set a credit limit, the hard part is sticking to it. It’s very tempting to extend limits because work is flowing your way or your customer appears to be paying you perfectly well. I appreciate that it’s very difficult to say “I can’t carry on working until you pay last week’s invoice”, but sticking to this limit will help you minimise a very real risk to your business.
Of course you have to take some calculated risks in any business and will need to make judgement calls about carrying on work, but too many times I’ve seen freelancers get stung by not sticking to their agreed credit limits. For example, sometimes freelancers find themselves getting more and more of a client’s business, unaware that it’s because no one else will deal with them - before they know it their exposure is dangerously high. This often happens with new freelancers who only have a handful of customers and are reluctant to turn down work and affect their turnover. It’s important to remember that a sale is not a sale until you have been paid!
Invoice regularly
Most of the freelancers that I’ve worked with don’t have a regular invoicing schedule - instead, they end up fitting it in between work gaps or late at night from their sofa, sometimes weeks after the work has been completed. There could, however, be a real cost behind not invoicing regularly and promptly. Any delay on your own part in invoicing could also be echoed by the client. Delaying sending your invoice means adding even more waiting time to getting paid, which could have a big impact on your cash flow.
You can mitigate this risk by reducing the payment terms on your invoice to a shorter time, but as many freelancers know, some bigger customers will have their own terms for payment that you have to live by. To minimise the gap between your desired payment date and your client’s preferred one you should invoice regularly and as soon after completion of work as possible. For everything you need to know about sending invoices that command attention, see Anna Debenham’s Creating a stormproof invoicing process.
Chase unpaid invoices with confidence
Once you’ve sent your invoice, no matter how much you hate it, you must remind clients when money is due and then chase when it’s overdue. In my experience, this