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    Credit control & accounts receivables

    How to resolve the late payment problem in creative industries

    The creative sector in the UK is under threat. As if the coronavirus pandemic with lockdowns and social distancing had not been hard enough on businesses, an epidemic of late payments is threatening creative agencies even further.

    Whilst a change of payment culture is required to turn the situation around, creative businesses can do several things to encourage clients to pay on time and in full.

     

    The Creative Sector In The United Kingdom

    Before the coronavirus pandemic hit, the creative sector in the UK employed more than 3 million people, with job growth at three times the national average. The pandemic has changed the face of the sector, especially for performance industries, which have been restricted in their activities since early 2020.

    Most of the businesses within the creative industries are so-called micro businesses, meaning they employ ten people or less. As a consequence, late payments have a disproportionately large impact. Almost 50% of the creative workforce are freelancers. Women have been at the forefront of the industry’s growth, with the number of female creative freelancers increasing by over 50% over the past ten years leading up to the pandemic.

    Women have been at the forefront of the industry’s growth, with the number of female creative freelancers increasing by over 50% over the past ten years leading up to the pandemic.

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    In 2018, nearly one in eight UK businesses were in the creative sector. Those businesses, whilst small on an individual scale, contributed a gross value added (GVA) of more than £111 billion to the country’s economy. As an industry sector, creatives are mighty.

    In fact, the GVA produced by the industry was more than that of life sciences, oil and gas, aerospace, and the automotive industries combined.  Creative businesses are also enablers for the wider UK economy as they stimulate other sectors.

    According to Creative England, creative industries have a crucial role in the post-pandemic recovery. The industry has the potential to generate an additional £28 billion for the economy by 2025 and create 300,000 new jobs.

    The impact of the creative sector reaches far beyond the industry itself. Oxford Economics estimates that before the pandemic, for every £ the creative industries contributed to the GVA, another 50p was generated in other industries through the creative sector’s supply chains.

    The pandemic has diminished the sector, especially in areas relying on footfall that had no opportunity to move online or substitute their income in other ways. Creative England cites museums, galleries, and libraries as well as music, and the performing and visual arts sectors among those most affected.

     

    An Epidemic Of Late (Or Missed) Payments

    In the creative industries, late payments are not a rare occurrence. They are a systemic problem. More than one in four creative businesses or freelancers report that they are consistently being paid late by their clients. Even more report having done work they have not been paid for at all. Late payments are endemic in creative industries.

    Nearly half of the businesses in the industry report having been paid late at least once. The average delay is more than just a few days. Late invoices are paid on average 23 days after they become due. What’s more, suppliers spend more than an hour of their time each day chasing payments. This is time they cannot dedicate to serving other clients or delivering new projects. The creative supplier loses twice.

    According to Market Finance, the average creative invoice is worth over £38,000. That means at any given time, the entire industry is more than £1 billion out of pocket. Late payments were on the rise before the coronavirus pandemic already, with the time freelancers had to wait for payment increasing from 12 to 23 days between 2018 and 2019. The pandemic added cancellations to the situation.

    As if those numbers were not yet giving enough cause for concern, the consequences have the potential to bring an entire industry to a standstill. The small size of most creative businesses makes them more vulnerable.

    Research by the Federation of Small Businesses (FSB) showed that 50,000 small and medium enterprises go out of business every year because of delayed payments. The British economy loses out to the amount of £2.5 billion.

    Freelancers have referred to late payments as the number one obstacle to business growth. Dealing with late payments has also forced businesses and freelancers to look for other solutions. Two-thirds have used invoice factoring. Nearly the same amount of creatives have extended trade credit, a majority of them to larger organizations than their own.

    Other businesses found themselves forced to discount their invoices to secure long-term business relationships. At the same time, allowing late payments once usually leads to more late payments. Creative business waiting to be paid for its services likely ends up paying its own suppliers late.

    There is a huge personal cost to freelancers and other creatives, too. Four out of ten have found themselves unable to cover basic living expenses. Three quarters report detrimental effects on their mental health, with 11% having been diagnosed with a clinical condition that is related to late payments and the stress they cause.

     

    Reasons For Late Payments

    The issue of late payments within the creative industry originates from larger companies employing more than 50 people. More than half of those companies pay creative suppliers and freelancers late.

    Whilst it is possible that these companies don’t understand the detrimental effect their behaviour has on their suppliers, creative suppliers also lack awareness of their rights.

    Handling late payments well starts with understanding your rights as a supplier. However, one-third of creative businesses and freelancers state that they don’t fully understand how to apply late payment charges or how much they can charge. Another option is to pursue payment through the small claims court but only 15% of freelancers state that they are aware of that right.

    Handling late payments well starts with understanding your rights as a supplier. However, one-third of creative businesses and freelancers state that they don’t fully understand how to apply late payment charges or how much they can charge.

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    Whilst the creative industry is growing fast and making a huge contribution to the UK economy, it does lack standard operating procedures. Without standardised terms and conditions, and service level agreements, disputes can arise easily. As small creative businesses and freelancers wait to resolve payment disputes, the smaller business suffers exponentially.

    As individual freelancers often find themselves in a position where they are negotiating with a larger party, leaving them at a disadvantage. In many cases, freelancers agree to unfavourable terms. Because of the inconsistent use of contracts, and a huge variety of terms and conditions in the sector, few freelancers are confident in using contracts and negotiating terms. As a consequence, they are generally at a disadvantage compared to larger parties.

     

    Why Trade Credit Can Cause Problems

    Trade credit has long been a normal practice in the creative industries. It’s the practice of invoicing customers once goods or services have been delivered and being paid after a set amount of time.

    The concept of trade credit should help small businesses ease their cash flow as they have longer to pay bills. However, it often benefits the larger party involved in the transaction. The customer eases their own cash flow situation by taking longer to pay whereas the supplier is left struggling.

    Compared to other industries, creative businesses offer trade credit more often. The industry was also found to be much more likely to offer credit to larger businesses, compared to other industry sectors. Whilst trade credit may have become an accepted standard for those buying creative services, both freelancers and creative businesses need to consider potential financial consequences before extending credit.

     

    Preventing Late Payments

    Small businesses and freelancers have several options to help prevent a large number of late payments. Whilst changes like standardised terms and conditions for the industry will take longer to implement, other adjustments are easily made by the individual creative (business).

    For instance, implementing a credit control automation software such as Chaser can drastically improve creative agencies' accounts receivables processes and help them put an end to late payments. By scheduling an automatic, personalised payment reminder before the invoice is due, asking if the customer has everything they need to make payment, creative agencies can massively increase the likelihood of getting paid on time. 

     

    Grant Credit Judiciously

    Extending trade credit has become a regular practice within the UK’s creative industries. However, freelancers and small businesses are under no obligation to offer this option to every customer.

    Consider setting up a credit control process with clear guidelines and requirements. This may sound like a waste of time, especially when you are a freelancer who is busy fulfilling customer briefs. However, it will pay for itself in the long term.

    Terms and conditions for granting credit becomes a legal document that can be signed and dated whenever you agree on a job with a customer. If everything goes well, the document simply becomes part of your files. Should a dispute arise, and payment is late, your terms become the basis on which you can start collecting money.

     

    Establish Clear Payment Processes

    It may sound obvious, but countless businesses fail to establish clear invoicing and payment terms.

    Start by sending clear, accurate invoices to your customers. Invoicing on a set day each month is good practice, as is informing your customers that this is what you will be doing. Invoices should contain all relevant payment information, such as bank details, due dates, and any other relevant terms.

    This may initially sound like a lot of work but much of it can be automated. Once created, a standard invoice template simply needs to be populated with the project to be invoiced. The remaining information is already in the right place.

    Make sure you offer simple ways of making payments. Not every customer prefers bank transfers. Some may want to use credit cards, whilst others might want to pay you in cash. The easier it is to pay an invoice, the more likely it becomes that it will be paid on time.

    It is worth sending polite payment reminders a few days before your invoices become due. Consider text messaging or other ways of communication that suit both you and your customers.

    A clear payment process also includes provisions in case payments are late. Lay out clearly when customers will receive overdue reminders and when late payment fees start applying. Your customers should also be aware after which time you will consider handing their debt over to a debt collection agency.

    The majority of this process can be automated using platforms like Chaser. This will allow you as a freelancer or a small creative business to focus on what you do best.

     

    Research Your Customers And Create Open Relationships

    Chasing up late payments or even involving debt collection agencies is unpleasant and best prevented, if possible.

    To that effect, research your customers. Their past payment record is the best predictor of their future behaviour. The pandemic has caused hardship for many businesses, but it is still worth avoiding slow-paying customers. This doesn’t mean turning down business. Asking for upfront payment or a deposit is a good option if you are unsure about a customer’s payment record. Another option would be to start by extending a smaller credit limit first and increasing it gradually as the relationship builds.

    If you're not sure on which customers you should keep an extra eye on, or who you should ask for payment upfront from, conducting a credit check of all potential and existing clients can make a huge difference. Chaser's credit check feature allows you to quickly and confidently verify any customer or supplier in the UK, ensuring they are financially stable and trustworthy before entering into any business agreement.

    Additionally, keeping lines of communication open and establishing strong customer relationships based on trust will go a long way towards avoiding unpleasant situations. Your customers may be in a similar situation where they are expecting a payment which they need to come in before they can pay you. In some situations, simply extending an invoice due date by a few days will be all that is required.

     

    Incentivise Early Payment

    Some freelancers report that larger companies have started establishing payment terms of 90 days. If the supplier would like to receive payment earlier, the companies charge a processing fee. For freelancers who have completed a large project, waiting 90 days can be problematic but so is losing a percentage of their projected income.

    Work out the benefits of early payment minus a small amount against the cost of waiting for the full payment. Consider overdraft fees and your operating costs and weigh them up against the impact the payment would have.

    Offering early payment incentives can help move your invoice to the top of the pile the customer has to pay in any given month.

     

    Ask For Help

    Keeping track of the numbers is not everyone’s favourite thing to do. If you are establishing yourself as a creative freelancer or small business, it’s worth getting professional advice from people who specialise in developing these processes.

    If you're struggling to keep track of and stay on top of your accounts receivables, Chaser's Outsourced Credit Control service might be exactly what you, and your creative agency need. By outsourcing your credit control, you will get an experienced credit control specialist working on your team ensuring that all customer invoices are being dealt with, and paid on time. If you want to learn more, please visit this page

     

    Conclusion

    Creative businesses and freelancers are hugely important to the health of the entire UK economy. Before the coronavirus pandemic, the sector employed more than 3 million people and supported even more through its supply chains.

    As the pandemic hit, creatives were amongst those most affected by lockdowns, venue closures, and social distancing measures. At the same time, the sector is more strongly affected by late payments than other industries with 40% of businesses reporting that they are regularly being paid late.

    As the economy is opening up, opportunities for creative businesses relying on footfall will improve. The future of the industry is looking bright, with pre-pandemic growth likely returning and continuing.

    Both the industry as a whole and its individual members have several opportunities to support their organisations’ growth and prevent late payments. Establishing clear payment and credit control terms with professional help should become the norm for freelancers and businesses.

    For many creative agencies, invoicing and collecting payments is not their favourite part of the business. Using software such as Chaser and automating processes may sound difficult but will go a long way towards making the financial part of their business run more smoothly. Once set up, automation means payment reminders are sent without additional work required. When payments become overdue, credit control platforms like Chaser will do the chasing for you.

    As a creative freelancer or a small business, this could save you more than an hour each day. Naturally, strong customer relationships and great communications can prevent or mitigate most late payment issues.

    However, setting yourself and your company up in a way that makes light work of your finances allows you to focus on what really matters – building your business.

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