Late invoice payment: How to prevent and manage overdue invoices

Published Monday 5 January 2026

Table of contents

• When do payments become legally late?
• Understanding late payments
• The impact of late payments on your small business
• How to set up effective credit control
• Invoice requirements for charging interest
• Understanding late payment charges and their effects
• How can your small business get paid on time?
• Strategies for chasing payments effectively
• Embracing digital payment solutions
• Manage late payments efficiently with Xero
• FAQs on late invoice payments

Key takeaways

• Implement clear payment terms upfront by specifying due dates, accepted payment methods, and late payment fees in your contracts before any work begins to prevent confusion and disputes.
• Utilize automated invoicing software with "pay now" buttons and multiple payment options to reduce payment delays by up to 54 days and save over 15 hours per week on administrative tasks.
• Apply statutory interest charges of 8% plus the Bank of England base rate along with fixed recovery costs (£40-£100 depending on debt size) on overdue payments, as these are your legal rights under UK law even without prior contract mention.
• Establish systematic credit control processes including credit checks on new customers, regular debtor book reviews, and automated follow-up reminders to prevent late payments rather than simply chasing them after they occur.

When do payments become legally late?

A payment officially becomes late after the date you've agreed with your customer. If you haven't agreed on a date, the law states that payment is late 30 days after either the customer gets the invoice, or you deliver the goods or provide the service (if this is later). For public authorities, the deadline is usually 30 days. Understanding this timeline is the first step in managing your cash flow effectively.

Understanding late payments

Late payments occur when invoices aren't paid by the agreed due date. This disrupts your cash flow and can impact business operations.

UK payment terms follow these legal requirements:

• Agreed terms: Payment is late after your specified due date
• No agreed terms: Payment becomes late 30 days after invoice delivery or service completion
• Legal protection: You can charge interest and recovery costs on overdue payments

Businesses in the UK commonly have payment terms of 30 days, but some choose to extend or reduce their terms. When payments fall outside these terms, they can disrupt operations and delay your investment plans.

Overdue payments cause stress and worry for many small businesses. A recent survey found that 22% of freelancers and small and medium-sized enterprise (SME) owners experienced an increase in late payments in the last year. Instead of spending time on work, small businesses find themselves chasing payments and questioning how they'll pay their bills.

The impact of late payments on your small business

Late payments can put your business at risk. One survey showed that 13% of SMEs and freelancers had to write off the money owed to them entirely. A single overdue invoice might prevent you from paying suppliers or staff on time.

The scale of the problem:

• 60% of UK small businesses are owed money from late payments
• Cash flow disruption affects day-to-day operations
• Supplier relationships suffer when you can't pay on time

If a large percentage of your income rides on one or two invoices, overdue payments can have a ripple effect that extends beyond your finances, and to your relationships. For example, a late payment could mean you need to delay payments to suppliers. As a result, they might choose to end the partnership, leaving you to source new suppliers and start afresh.

Investments in your business might also need to be put on hold, due to the effects of late payments. Instead of replacing an old piece of equipment, you might need to hang onto your cash, reflecting a broader trend where companies are paying later and seeking longer payment terms to conserve cash. If you can't upgrade your equipment, this could impact efficiency and frustrate teams who waste time and energy working with sub-par equipment.

Additional consequences of late payments include:

• Staff payment delays: Unable to meet payroll obligations on time
• Reduced purchasing power: Less money available for essential supplies
• Operational restrictions: Limited business activities while awaiting payment
• Financial visibility issues: Difficulty assessing true business performance
• Cash flow reduction: Less working capital for growth and investment

Addressing late payments promptly can help you avoid circumstances like these. Picking up on overdue payments quickly gives you more time to cushion the impact of reduced cash flow.

How to set up effective credit control

Good credit control is not about chasing debts; it is about preventing them. By putting simple checks and processes in place, you can protect your business from the start.

Carry out credit checks on new customers

Before you agree to work with a new client, it's wise to check their credit history. This helps you understand their payment habits and assess the risk of late or non-payment. A quick check can save you a lot of trouble later on.

Set clear payment terms upfront

Make sure your payment terms are clear and agreed upon before any work begins. This includes the due date, accepted payment methods, and any late payment fees. Putting this in your contract or terms of service leaves no room for confusion.

Review and analyse your debtor book

Regularly review who owes you money. This helps you spot patterns with certain clients and identify invoices that are creeping towards their due date. Staying on top of your debtor book means you can act quickly and keep cash flowing.

Invoice requirements for charging interest

If you decide to charge interest on a late payment, your invoice needs to be clear. You don't need to have mentioned it in your original contract to claim statutory interest. Simply issue a new invoice that includes the original amount, plus separate lines for the late payment compensation fee and the accrued interest. Calculate the interest up to the day you send the new invoice.

Understanding late payment charges and their effects

Late payment charges incentivise clients to pay on time by adding financial consequences for delays. These charges can significantly improve your payment collection rates.

How charges work:

• Deterrent effect: Clients avoid extra costs by paying promptly
• Legal backing: UK law supports your right to charge interest and fees
• Two-way application: You may face charges if you pay suppliers late

UK businesses can charge two types of late payment fees:

• Statutory interest: 8% plus Bank of England base rate on the outstanding amount
• Fixed recovery costs: £40 for debts under £1,000, £70 for £1,000-£9,999, £100 for £10,000+
• Combined approach: Charge both interest and recovery costs together

According to His Majesty's Revenue and Customs (HMRC), interest on unpaid invoices should be charged at 8% (this is statutory interest), plus the Bank of England base rate for business-to-business transactions. For more information, read the HMRC guidance on charging interest on late payments.

Navigating the late payment legislation

The Late Payment of Commercial Debts Interest Act 1998 sets out terms for charging interest on overdue commercial invoices. If you plan to charge clients interest for late payments, you'll need to be familiar with this legislation.

Key provisions of the Late Payment Act:

• Qualifying debts: Money owed for goods or services under contract
• Coverage: All business-to-business transactions for supplies
• Interest start date: Day after the agreed payment date or 30-day period ends
• Automatic rights: No need to mention charges in original contract terms

Once statutory interest begins to accrue, the supplier is also entitled to a fixed sum of:

• £40 for debts less than £1000
• £70 for debts less than £10,000 (but more than £1000)
• £100 for debts of £10,000 or more

To claim statutory interest on an overdue payment, simply send a new invoice with a line for compensation and a line for the interest due.

Interest is calculated daily, so make sure you send the invoice on the day you calculate the interest. The small business commissioner has a handy late payment interest calculator you can use.

How can your small business get paid on time?

Prevention saves time and money. Global research shows that problems with securing prompt payment remain high compared with historical averages. Many businesses spend more than four hours a week chasing payments – time you could use to grow your business.

Automation benefits:

• Time savings: Reduce manual follow-up tasks by up to 15 hours per week
• Faster payments: Get paid 54+ days sooner with automated reminders
• Better relationships: Maintain professionalism while pursuing payments

The benefit of getting paid on time isn't just good cash flow. It means better relationships with clients, and more room to embrace technology and develop your services. One of the most effective measures you can take to manage late payments is mastering your invoice process. Here's how.

Invoicing best practices

Invoice optimisation directly impacts payment speed. Professional invoicing practices can reduce payment delays by weeks.

Essential improvements:

• Digital invoicing software: Add 'pay now' buttons for instant settlement
• Clear payment terms: Specify due dates and late fees upfront
• Multiple payment options: Accept cards, bank transfers, and digital payments
• Automated follow-ups: Send reminders without manual intervention

1. Use professional invoicing software

Unlike paper invoices, digital invoices can be customised to make payment easier. For example, you can add a 'pay now' button in Xero so clients can settle the bill in a few clicks.

If you use eInvoicing software, you can also make paying suppliers on time easier, helping you maintain a healthy relationship. You can learn more in the guide on the benefits of electronic invoicing (eInvoicing).

2. Set clear invoice payment terms

Before starting a project, make sure you've agreed on invoice payment terms with the client. This ensures you've aligned expectations ahead of the invoice payment date.

3. Offer multiple payment options

With more ways to pay, clients can settle the bill in a way that's simple and convenient for them. And with today's lightning-fast bank transfers and card payments, it could mean the money is in your account quicker.

4. Automate late payment follow-ups

According to Chaser, people who use their automated invoice reminders can get paid 54 or more days sooner. Reduce manual invoice admin and let software do the work.

Strategies for chasing payments effectively

Effective payment collection relies on systematic follow-up and strong client relationships. The right approach protects both cash flow and business partnerships.

Foundation for successful payment collection:

• Relationship focus: Maintain professional, empathetic communication
• Systematic approach: Follow consistent collection procedures
• Multiple channels: Use email, phone, and text messages (short message service, SMS) for better response rates

Proven collection strategies:

• Systematic reminders: Send consistent follow-ups to prevent invoices being forgotten
• Multi-channel approach: Combine email and SMS for 56% faster payment (within one week)
• Payment plans: Offer instalments to financially struggling clients for guaranteed cash flow
• Professional collection: Use debt collection agencies as final option (fees apply, success not guaranteed)

To get the ball rolling on your late payment follow-ups, here's an email template you can customise:

Hi [INSERT CLIENT NAME],

I'm emailing to follow up on an unpaid invoice.

I can see an outstanding payment of [INSERT SUM] is overdue on invoice [INSERT INVOICE NUMBER].

Since the payment due date was [INSERT DATE], this invoice is overdue by [INSERT NUMBER OF DAYS].

For every day this payment is outstanding, interest will accrue on top of the original sum. The sooner you're able to settle the payment, the less interest you will need to pay.

If you're unable to make the full payment now, I'd be happy to discuss a payment plan with you. Let me know if you'd like to talk this through.

Thanks,

[INSERT YOUR NAME]

Embracing digital payment solutions

Managing late payments can take a lot of time and energy, so using digital payment solutions can help you get paid more quickly. By adopting digital payment solutions, you can alleviate some of this stress and improve your chances of getting paid quickly. Businesses that use Chaser save on average 15+ hours per week on accounts receivable tasks, time that could be spent serving your clients.

Digital invoices offer clients more ways to pay. Add a 'pay now' button to your invoices in Xero, and enable card and bank payments so that clients can choose the most convenient method.

If you're worried that digital tools take away the human touch, you can still personalise them so your messages sound like you. With Chaser and Xero, you can customise automated follow-ups to be friendly and personable so they still sound like you.

Manage late payments efficiently with Xero

It's up to clients to settle the bill on time, but software like Xero and Chaser can help you nudge them along.

Friendly and personable automation makes it possible for you to keep on top of invoices without needing to hit send. When you cut unnecessary admin, you can focus on the parts of your business you enjoy and that drive growth.

Looking for more ways to improve cash flow? Visit the cash flow content hub for practical tips and guidance you can use straight away.

Try Xero for free to streamline your management of late invoice payments.

FAQs on late invoice payments

Here are answers to some common questions about dealing with late payments.

How late can an invoice be paid before I can take legal action?

You can start the process for legal action as soon as the payment is overdue according to your agreed terms or the statutory 30-day limit. However, it's always best to try and resolve the issue directly with your client first, as legal action can be costly and time-consuming.

Can I charge interest if it wasn't mentioned in my original contract?

Yes. For business-to-business transactions in the UK, you have a statutory right to claim interest and a fixed compensation sum for late payments, even if you didn't include it in your payment terms.

What's the difference between statutory and contractual interest rates?

Statutory interest is the rate set by law that you can charge on late commercial payments. Contractual interest is a rate you and your customer agree on in your terms and conditions. If you have a contractual rate, you can't claim statutory interest.

Do I need to notify customers before charging late payment interest?

While you have a legal right to charge interest, it's good practice to inform your customer first. A polite reminder that interest will be applied can often prompt payment. If you do charge interest, you must send them a new invoice detailing the charges.