Late payments of invoices are a major problem for businesses of all sizes, touted as being responsible for over a quarter of all business failures.
Even a single unpaid invoice can cause cash flow issues and a whole host of downstream effects. There are a number of strategies, as well as government initiatives, in place to help combat the detrimental effects of late invoice payments. From charging interest to industry best practices, we take a look at which strategies are best for your business.
What counts as a late invoice?
Simply put, a payment is considered late if it isn’t received by the agreed due date specified in the contract or invoice. Payment due dates often depend on the nature of the transaction.
- For public sector clients, payment terms are usually set to 30 days.
- For business-to-business (B2B) transactions, payments can typically be set at up to 60 days, unless a longer period is agreed by both parties.
Providing there is no mutually agreed payment date, the UK law deems a payment late 30 days from the date the invoice is received by the customer or the supply of goods/services, whichever comes later.
As soon as a payment becomes late, you are rightfully entitled to recover fixed compensation as well as late payment interest from the Late Payment of Commercial Debts (Interest) Act 1998.
Strategies for dealing with late payment of invoices
The following are some effective strategies businesses can employ to deal with late payments:
Prevention
By implementing measures to avoid having to deal with late payments in the first place, you can avoid a whole host of headaches. Clear payment terms, in writing, ensure that both parties are fully aware of due dates and any penalties for late payment.
Making sure your invoices are formatted clearly, with itemisation and the payment deadline clearly displayed is a must. If payment is made easy with multiple payment options, this is a bonus! Furthermore, assessing the creditworthiness of a new client with a credit check can help you to avoid high-risk customers. Dealing with businesses that have a Fair Payment Code award (discussed later in this guide) can also give further peace of mind.
Chasing up
As soon as the invoice becomes overdue, contact the client with a polite reminder. Using multiple channels (email, phone, letter) is good practice, as well as keeping records of all correspondence. It is important to remind clients that you have the right to charge statutory interest and compensation for late payments, as per UK law for business-to-business invoices. Automation tools are also available that integrate with your accounting software, for easy scheduling of follow-ups.
Negotiation and flexibility
For larger debts, or for handling disputes, consider agreeing to a payment plan with the client to recover the cost in instalments.
External help
Small businesses are able to seek help from the Small Business Commissioner, who have so far recovered £8 million in unpaid invoices for small businesses. They can mediate and make non-binding recommendations for any dispute. If, after repeated attempts, a payment is not received, consider legal action (see below for further details). As a very last resort, consider the use of a professional debt recovery service.
How can I calculate the interest on late payments?
Calculating interest on late payments may seem like a daunting prospect, but it is relatively straightforward, especially for business-to-business transactions. Here is a step-by-step guide.
1. Determine the applicable interest rate
- Statutory Interest: Unless your contract sets a different rate, you can charge 8% above the Bank of England base rate. For example, if the base rate is 4.5%, the statutory rate is 12.5%.
- Contractual Rate: If your contract specifies a late payment interest rate, use that instead. It must offer a “substantial remedy” for late payment and cannot be unfairly low.
2. Identify the start date for interest
- Interest starts from the day after the agreed payment deadline.
- If no payment terms are specified, payment is considered late 30 days after the customer receives the invoice or the goods/services, whichever is later.
3. Use the formula for simple interest
The formula for calculating late payment interest is:
Interest = Debt Amount x Annual Interest Rate x Number of Days Late / 365
Step-by-step:
Calculate the annual interest:
Debt Amount x Interest Rate
Find the daily interest:
Annual Interest / 365
Multiply daily interest by the number of days overdue.
Example:
A £5,000 invoice, 50 days overdue, with a statutory rate of 12.5%:
- Annual interest: £5,000 × 12.5% = £625
- Daily interest: £625 ÷ 365 = £1.712
- Total interest: £1.712 × 50 = £85.60
4. Add compensation (optional)
You can also charge a fixed compensation amount per invoice, depending on the size of the debt:
- £40 for debts up to £999.99
- £70 for debts £1,000–£9,999.99
- £100 for debts over £10,000
5. Use online calculators for convenience
The Small Business Commissioner and other providers offer free online calculators. Enter the invoice amount, due date, and payment date for an instant calculation.
6. Notify the debtor
Clearly state the amount of interest and compensation you are charging, referencing your legal right to do so.
What are the benefits of joining the Fair Payment Code?
Replacing the Prompt Payment Code in 2024, the Fair Payment Code (FPC) is a Small Business Commissioner scheme that aims to combat late payments by incentivising best practice across UK businesses. It is a Gold, Silver, and Bronze tiered reward system that acknowledges good payment performance by businesses.
Gold: Pays at least 95% of all invoices within 30 days
Silver: Pays at least 95% of all invoices within 60 days, and 95% of invoices to small businesses (under 50 employees) within 30 days.
Bronze: Pays at least 95% of all invoices within 60 days.
These awards last for two years, with businesses being required to reapply to maintain their status. All awardees must establish transparency in their communication of payment terms, putting them in writing and promptly notifying suppliers of delays.
Any business, regardless of size can apply. In the application process, you would select the tier that best represents your current payment practices. Benefits include an enhanced reputation and trust with suppliers, through demonstrating a commitment to ethical and responsible payment practices. It may even give competitive advantages over businesses without an award. Overall, the Fair Payment Code contributes to a healthier overall business ecosystem in the UK, supporting cash flow and growth.
Legal action
If your client has continued to ignore payment requests, several escalating legal options are available to you:
Letter Before Action (LBA)
A formal Letter Before Action is a final written warning stating that if a payment is not made within a specified period, (typically 7-14 days), then legal action will be pursued. The letter should clearly outline the amount owed, make reference to previous reminders and specify your intentions to take legal action.
Small Claims Court
For debts up to £10,000 in England and Wales, you can file a claim via the Small Claims Court, using the Money Claim Online Service. If the process is successful, the court may issue a County Court Judgment (CCJ) against the client which severely impacts their credit rating.
Legal Advice
For complex cases, or those of particularly high value (over £10,000), consult a solicitor for tailored advice and help with potential escalation to higher courts.
Conclusion
Late payment is not just an inconvenience – it can have a damaging effect on your business’s stability, development, and flow of funds over the long term. By being explicit about your rights, being proactive about reminders, as well as being upfront with your payment terms, you can regain control and defend your business. Bringing late-paid invoices under control is not simply a matter of getting paid – it is a matter of running a more robust, resilient business.
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