Late payments can seriously impact cash flow, especially for small and medium-sized businesses. For UK businesses, where late payments cost billions of pounds each year, having a robust process for managing overdue invoices is essential. Here are some practical steps to help you deal with late payers, maintain professional relationships, and stay compliant with UK legislation.
1. Set Clear Payment Terms from the Start
One of the best ways to prevent late payments is by setting out clear payment terms upfront. Payment terms define:
- Invoice due dates (typically 30 days unless otherwise agreed)
- Penalties for late payment (interest or fees)
- Accepted payment methods
Clearly stating these terms on your invoices and contracts helps your customers understand their obligations and avoids any confusion. In the UK, you can charge statutory interest on late payments under the Late Payment of Commercial Debts (Interest) Act 1998 if no other rate is agreed upon. Currently, the statutory interest rate is 8% plus the Bank of England base rate.
2. Send Invoices Promptly and Follow Up Regularly
Timely invoicing is crucial. Send invoices as soon as services or goods are delivered to avoid unnecessary delays in payment. Ensure your invoices are clear, accurate, and include all necessary information, such as:
- Business and customer details
- A unique invoice number
- Purchase order number (if your customer provided you with one)
- Payment terms and due date
- Bank account details for easy payment processing
Set up a routine to follow up with clients as the payment due date approaches. You can use accounting software to automate reminders, which will not only help you manage overdue invoices but also serve as a gentle reminder for clients to settle their accounts on time.
Cloud bookkeeping software such as Xero allows you to automate a lot of this process, taking the admin burden away from you and ensuring that your bookkeeping is up to date regularly will also lead to having full clarity on who owes your business money.
3. Establish a Process for Dealing with Overdue Payments
Developing a consistent process for handling overdue payments is key. Here’s an example of an escalating approach:
- Friendly reminder: Send a polite email reminder a few days after the payment due date has passed.
- First formal reminder: If payment hasn’t been received within a week or so, send a more formal message, reminding the customer of their contractual obligations.
- Final notice: If the invoice is still unpaid after two reminders, send a final notice, stating that legal action may be pursued if payment is not received by a specified date.
Make sure to document each stage of your follow-up process to keep records in case legal action becomes necessary.
4. Charge Interest and Late Fees
As mentioned, UK law allows businesses to charge interest and late fees on unpaid invoices. Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses can charge 8% plus the Bank of England base rate as statutory interest, plus a fixed late payment fee depending on the debt’s value:
- Up to £999.99: £40
- £1,000 – £9,999.99: £70
- £10,000 and above: £100
It’s essential to notify your client of these charges if you decide to apply them. Inform them of their overdue status and any accrued interest or fees, as this often encourages payment without additional steps.
5. Consider Offering Payment Plans
If a client genuinely cannot make full payment due to financial difficulties, consider offering a payment plan. This approach allows your business to receive payment over time while preserving the client relationship. When setting up a payment plan, ensure both parties agree in writing to the terms and maintain documentation.
6. Engage a Debt Collection Agency
If the invoice remains unpaid after all attempts, it may be time to enlist professional help. Many debt collection agencies specialize in B2B debt recovery and can collect overdue invoices on your behalf. Note that some agencies work on a “no win, no fee” basis, meaning they only charge if they successfully recover the debt. Be aware that outsourcing to a collection agency can impact your relationship with the client, so use this as a last resort.
7. Consider Legal Action
If all else fails, legal action may be necessary. In the UK, you can make a claim for an unpaid invoice through the small claims court if the debt is under £10,000. For larger debts, a solicitor can guide you through the best course of action. However, pursuing legal action should generally be the last resort, as it may incur additional costs and time.
8. Protect Your Business Against Future Late Payments
To avoid similar issues in the future, consider these proactive measures:
Direct Debit: You can use a direct debit cloud solution such as GoCardless
Credit checks: Conduct credit checks on new clients to understand their payment history and reliability.
Upfront deposits: For large projects, request an upfront deposit to mitigate financial risk.
Invoice factoring: If late payments are a persistent issue, consider using an invoice factoring service. Factoring companies pay a portion of your invoice amount upfront, providing immediate cash flow.
Summary
Dealing with late payers can be challenging, but by establishing clear payment terms, following a structured approach, and leveraging UK laws designed to protect businesses, you can minimise disruptions to your cash flow.
At Brisan Accountancy, we understand the importance of reliable cash flow to keep your business running smoothly. If you’d like more tailored advice or assistance managing your finances, contact us today to learn how we can support your accounting needs.
