Timely income is essential for a business’s financial health; bills need to be paid, regardless of whether your own invoices have been settled. You may have a talented team and excellent products or services, but that can’t cover rent, wages, utilities, or supplier payments if cash flow slows down.
Estimated to cost the British economy around £11 billion every year, late payments are so much more than just an inconvenience. Small and medium-sized businesses that don’t have a safety net to cover the gap whilst waiting for payments can incur mounting overdraft charges and strained supplier relationships if their own payments are then delayed. In the worst cases, this can mean a total failure of the business.
Late payments often arise from poor cash flow management, administrative errors, or disputes about the quality of goods and services provided. However, some larger businesses can be deliberately dishonest, delaying payment to a smaller business as a form of informal credit. This happens more often than you might expect and has led to enough high-profile scandals for Parliament to implement statutory protections for businesses unfairly denied income they’re owed.
The legal framework
The Late Payment of Commercial Debts (Interest) Act 1998 gives businesses the right to charge interest and claim compensation when commercial debts are paid late. The terms are automatically applied, so there’s no need to include them within your contracts, but you can choose to agree to different terms if you wish.
Statutory interest: claimed at 8% above the Bank of England base rate. The interest is simple, not compound, and begins to accrue from the agreed payment date as stated in the contract. If no fixed date was agreed, interest begins to accrue 30 days after you delivered the goods or completed the service, or 30 days after you issued your invoice – whichever is later. The interest continues to accumulate until the debt is fully paid, so a longer delay means a higher total owed.
Fixed compensation: for the inconvenience and administrative cost of chasing a late payment, affected businesses can claim:
- £40 for debts under £1,000
- £70 for debts between £1,000 and £10,000
- £100 for debts over £10,000
- Any other reasonable costs involved in recovering the debt, such as legal fees
On your own terms
Think of the statutory rights under the Act as a safety net – something to fall back on if nothing else is in place. You can specify your own terms in your contract, such as a higher interest rate, administration charges, or provisions for returning goods if the payment isn’t received.
Many businesses choose to incorporate late payment charges into their standard T&Cs to incentivise prompt payment, but the terms must be transparent and genuinely negotiated, and cannot be deemed “grossly unfair”. For example, large companies may impose extended payment terms on smaller suppliers, which can place unsustainable pressure on smaller businesses with limited cash reserves. If your contract terms are less favourable than the statutory protection, the law will override them.
Enforcing your rights
Statutory rights to interest and compensation don’t automatically result in payment: they simply increase the amount owed and give you additional leverage when pursuing the debt.
To physically recover the money owed, you’ll need to follow the usual enforcement process:
- Send payment reminders, starting with polite reminders and escalating to formal demands
- Issue a solicitor’s letter
- Threaten court proceedings
- Begin court proceedings if the threat alone was not enough to receive the payment – if you obtain a court order, you may need further steps such as arrestment of bank accounts or attachment of goods
This process can be time-consuming and frustrating, particularly if the debtor deliberately drags things out. However, the longer the delay, the more they’ll ultimately owe once interest and costs are added. But it’s highly unlikely that there will be any salvageable relationship left after such events, which can be a huge problem if the customer was a source of repeated orders or business.
Prevention is better than cure
Despite the Late Payment of Commercial Debts (Interest) Act protecting against late payments, avoiding payment delays in the first place is always preferable.
- Clearly specify payment terms: State exactly when payment is due. “Payment due within 14 days of invoice date” is better than vague terms like “payment on completion.”
- Put everything in writing: Verbal contracts are valid but harder to enforce. Well-written terms make payment obligations undeniably clear.
- Request deposits or staged payments: For larger projects, ask for payment in advance or at key milestones rather than waiting until the end.
- Credit check new customers: Before extending credit, check whether a customer has a history of late payment or financial difficulty.
- Invoice promptly and accurately: Make sure invoices are clear, correct, and sent as soon as work is completed, reducing the excuses a customer can give for delay.
- Follow up quickly: Don’t wait months before chasing payment; contact customers as soon as it becomes overdue.
- Build late payment charges into your terms: Make it clear from the outset that interest and admin charges will apply to late payments.
Late payments can cause a serious drain on business resources, threatening the survival of otherwise healthy companies. The protections under the Late Payment of Commercial Debts (Interest) Act give you leverage to recover what you’re owed, but legal rights are only useful if you’re prepared to exercise them.
Clear contracts, prompt invoicing, consistent follow-up, and willingness to take formal action when necessary all play a role in maintaining healthy cash flow.
John Roberts is a Partner and Director at Austin Lafferty Solicitors. John has been with the firm for almost 20 years, with experience in all areas of business law.
