How to deal with late payments

Late payments are one of the most frustrating parts of running a business. But for many UK firms, they’re more than just a nuisance; they cause serious financial strain.

The government estimates late payments cost the UK economy £11 billion every year, with around 38 businesses closing each day because they don’t receive money they’re owed. And even for those that stay afloat, the impact can be significant: delayed hiring, stalled growth, and business owners having to dip into their own pockets to cover shortfalls.

It’s also incredibly common. According to the Federation of Small Businesses (FSB), more than half of SMEs deal with late payments regularly, with invoices often stretching 60 to 90 days beyond agreed terms. That’s money already earmarked for wages, stock, rent or tax.

While the government has committed to tackling the issue, with ongoing efforts to clamp down on poor payment practices and support small businesses, the era of late payments isn’t over just yet.

You can’t always prevent late payments, there are ways to reduce the risk and stay in control when they happen.

1. Set clear payment terms from the start

Prevention is always easier than chasing. Make sure your payment terms are clearly outlined before any work begins. That includes:

• Payment deadlines (e.g. 14 or 30 days)

• Accepted payment methods

• Any late payment fees or interest

Clear terms help set expectations and give you something to refer back to if payments are delayed.

2. Invoice promptly (and accurately)

Late payments can sometimes start with the invoice itself. Send invoices as soon as the work is completed, and double-check that:

• All details are correct

• Purchase order numbers are included (if needed)

• The payment due date is clearly visible

Even small errors can cause delays, especially when clients have strict payment processes.

3. Don’t be afraid to chase

Chasing payments can feel uncomfortable, but it’s (unfortunately) a normal part of doing business. It’s generally best to start with a friendly reminder before the due date, then follow up if payment doesn’t arrive. In many cases, a simple reminder will be enough to prompt action.

• Check the invoice has been received

• Ask when payment is scheduled

• Offer to resend details if needed

4. Consider charging interest or fees

Under UK law, you may be able to charge interest on late commercial payments.

You might not always want to enforce this, especially with long-term or big name clients, but making it clear that you can charge interest can sometimes encourage faster payment and set expectations going forward.

5. Know when to escalate

If a payment is significantly overdue, you may need to take additional steps. This could include:

• Sending a formal demand letter

• Using a debt recovery service

• Taking legal action as a last resort

This is rarely an easy decision to make, especially if you value the relationship, but keep in mind that late payments don’t just affect one invoice; they can have a ripple effect across your entire business. If you’re not getting paid on time, you may struggle to meet your own financial commitments. That could mean delaying payments to suppliers, missing deadlines, or damaging relationships with the businesses you rely on.

6. Consider invoice financing

If late payments are a regular issue, it might be worth looking at ways to smooth out your cash flow. Invoice financing is one option, as it lets you access money tied up in unpaid invoices, rather than waiting for customers to pay. 

Typically, a lender will advance you a percentage of the invoice value upfront, helping you keep cash moving through your business. This can be particularly useful if delayed payments are putting pressure on day-to-day costs or are holding back investment decisions.

Here are the key considerations re: invoice finance:

Pros:

• Immediate access to cash to help cover operating expenses

• More predictable cash flow to make it easier to plan ahead

• With invoice factoring, the provider may take over chasing payments

Cons:

• Fees can be higher than other types of finance

• Your customers will have to deal with a third party

The bottom line

Late payments are a persistent challenge for UK businesses, and for many, they go far beyond inconvenience.  While it’s tough to avoid late payments altogether, having clear processes in place, staying consistent with follow-ups, and taking steps to protect your cash flow can help reduce the strain.