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 UK economy £11 billion annually, late payments are more than an inconvenience. SMEs without cash reserves can face overdraft charges, strained supplier relationships, and in extreme cases, business failure.
Late payments stem from poor cash flow, admin errors, or disputes—but can also be deliberate, with larger firms using smaller ones as informal credit. This has prompted statutory protections.
The legal framework
The Late Payment of Commercial Debts (Interest) Act 1998 allows businesses to charge interest and claim compensation on overdue payments. These rights apply automatically, though many include them in contracts for clarity.
Statutory interest is 8% above the Bank of England base rate, applied as simple interest from the agreed payment date. If no date is set, it starts 30 days after delivery, service completion, or invoicing (whichever is later), and accrues until paid.
Fixed compensation can be claimed:
£40 for debts under £1,000
£70 for debts between £1,000 and £9,999.99
£100 for debts of £10,000 or more
Plus reasonable recovery costs exceeding these amounts
On your own terms
Statutory rights are a baseline. Contracts can set stronger terms (e.g. higher interest, admin fees), provided they are fair and transparent. If terms are weaker than statutory rights, the law will override them.
Enforcing your rights
These rights increase leverage but do not guarantee payment. Recovery typically involves:
Sending reminders (informal to formal)
Issuing a solicitor’s Letter Before Action
Threatening court proceedings
Starting court action if needed (e.g. County Court Judgment, enforcement measures)
This process can be slow and may end commercial relationships, but delays increase the total owed through added interest and costs.
Prevention is better than cure
Avoiding late payments is preferable:
Clearly define payment terms (e.g. 14 days from invoice)
Put agreements in writing
Request deposits or staged payments
Credit check new customers
Invoice promptly and accurately
Follow up overdue invoices quickly
Include late payment charges in standard terms
Late payments can severely impact business stability. While the Act provides leverage, it is only effective if used. Clear terms, prompt invoicing, and consistent follow-up are key to maintaining cash flow.
