Payment plans

Government advice to small businesses lists a payment plan as a normal step in chasing a debt, before a final demand. The UK's Small Business Commissioner says that if a client "is struggling with cash flow, you could offer to break the payment into manageable instalments", and Australia's business.gov.au suggests you "negotiate a payment schedule if needed" when you first get in touch.

This guide is about the first. For the second, see deposits and progress billing.

When a plan makes sense

A plan is for a client who can't pay yet, not one who won't. If they agree the money is owed and tell you why it is late, such as a delayed payment of their own or a slow month, a plan gets you paid without a dispute. If they are disputing the work, or have stopped replying, a plan won't fix that; settle the dispute first, or move to a final notice.

I'd ask the client to propose the amounts and dates. A plan they suggested is one they believe they can keep, and you can still say no to one that runs too long.

What to agree in writing

The Small Business Commissioner's advice is to make sure "all terms are clearly outlined and documented in writing and shared by email to avoid future disputes". An email the client replies to agreeing is enough for most plans. It should cover:

• The balance: the invoice number and the amount still owed.
• Each payment: how much, and the date it is due.
• How to pay: the same payment details as the invoice.
• Interest and fees: whether you are setting aside the late payment interest or fixed sum the law or your contract allows, or keeping them. Say which, so it can't be argued about later.
• A missed payment: what happens if one is late. One way to write it is that the whole remaining balance then becomes due at once.

Late payment laws by country shows what interest and fixed sums apply where you invoice, so you know what you are setting aside if you waive them.

Splitting the balance

Equal instalments rarely divide a balance into whole cents. Say 1,000 is split three ways: that is 333.33 twice and 333.34 once, not three payments of 333.33 that leave a cent unpaid. The payment schedule calculator does this: enter the balance as the total and give each payment an equal share, and the payments add up to the balance exactly.

Recording the payments

Keep the original invoice, and record each payment against it. The debt has already been invoiced, so I'd not raise a new invoice for each instalment: your books would then show the same sale twice, and if you charge VAT, the VAT twice. Instead, note each payment as it arrives, and send the client an updated copy of the invoice showing what has been paid and what is left.

The payment received email generator writes the email that confirms each instalment and states the balance, which also gives you a written record that the plan is being kept.

If a payment is missed

Contact the client the day after, as you would for any late payment. If they missed it for a reason and can catch up, a revised date may be enough. If they stop paying, the plan you agreed in writing is your evidence of the debt and of what they accepted, and the final notice letter generator writes the last letter before you hand it on.

In the UK, a small business owed money by a larger one can also ask the Small Business Commissioner for help before going to court. In Australia, business.gov.au points to the small business ombudsman's dispute support, and reminds you that contacting a business about a debt carries legal obligations of its own.

Showing it in the invoice generator

In the invoice generator here, open the original invoice from the invoice history, press + Add amount paid and enter the total received so far. The invoice then shows the balance still due. Put the agreed dates and amounts in Notes, so each updated copy carries the plan with it.