Strategies to manage late payments for UK small businesses

Every small business owner knows how great it feels to get paid for a job well done. Each invoice paid is another opportunity to do more of what you love.

So when a client or customer pays late, it can be a major setback. And this situation is far from uncommon; 87% of businesses are typically paid late, according to accounts receivable software provider Chaser.

Getting paid on time isn’t just a matter of convenience for small businesses – it’s a matter of survival. With less capital and tighter margins, late payments can significantly impact small business cash flow.

Without enough cash in your business, you might struggle to pay your bills, invest in your staff, and keep up with running costs. Ultimately, outstanding overdue payments could lead to negative cash flow – where you have more money going out of your business than coming into it.

In this guide, we explain how small businesses in the UK can stay on top of late payments and reduce the risk of cash flow issues. We provide actionable tips and best practices to reduce late payments, so you can spend less time worrying about how you’ll pay the next bill, and more time building a business that thrives.

Understanding late payments

Late payments occur when invoices aren’t paid until after the due date. Invoice payment terms are typically set ahead of a project, so the business and the client are clear on payment expectations. If you haven’t agreed on a specific payment date, the law states that payment is late 30 days after the customer receives the invoice (or you deliver the goods or services – if this is later).

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

Overdue payments cause stress and worry for small businesses. 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 have serious repercussions for small businesses. Sometimes, a single invoice can be the difference between being able to pay your suppliers and staff or not. Three in five UK SMEs are waiting on overdue payments from unpaid invoices.

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. If you can’t upgrade your equipment, this could impact efficiency and frustrate teams who waste time and energy working with sub-par equipment.

You might experience other consequences of late payments, such as:

• Inability to pay staff on time
• Limited purchasing power
• Restricted operations while the payment is pending
• Difficulty seeing your true financial picture
• Reduced cash flow

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 – and hopefully get the invoice settled before reaching negative cash flow.

Understanding late payment charges and their effects

Introducing late payment charges could help you crack down on overdue payments. If clients face increased costs because they haven’t paid your invoice, this could incentivise them to settle the bill. Bear in mind that if you also fail to pay suppliers on time, you could be subject to late fees too.

When it comes to late payment charges, UK small businesses have a few options. You can opt for charging interest on late payments, and you can also charge a fixed sum for the cost of recovering a late payment on top of the interest.

According to 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.

When do late payments get reported in the UK?

If – even after introducing fees for late payments – a client still refuses to pay, you could approach the small claims court. But this should be treated as a final option; application and court fees could quickly outweigh the debt, and there’s no guarantee you’ll win the case.

Before engaging the small claims court, make sure the payment due date has passed, and you’ve tried multiple contact methods with the client (more on that below).

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.

Here, we highlight the key points from the act:

- Under this legislation, a qualifying debt is a debt created by virtue of an obligation to pay the whole or part of the contract price

- The act applies to contracts for the supply of goods or services

- Statutory interest begins to accrue from the day after the relevant day for the debt. The relevant day for the debt can either be:

• the agreed payment date
• the last day of the relevant 30-day period

- 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.

Strategies for chasing payments effectively

Chasing business payments isn’t something to look forward to, but there are steps you can take to make it less overwhelming.

Getting overdue payments settled often comes down to your client relationships. Forming healthy relationships with clients and suppliers helps build empathy and understanding – and enables you to have open and friendly conversations about the situation.

With that in mind, here are some strategies for chasing payments effectively:

• Send polite, firm payment reminders and establish a consistent follow-up schedule so older invoices don’t fall through the cracks.
• Use multiple communication methods. According to a report by Chaser, businesses that use a combination of SMS invoice payment reminders and email payment reminders increase their chance of getting paid within a week of the invoice due date by 56%.
• Set up payment plans for clients in financial difficulty. While you may not get the full sum immediately, you’ll receive consistent payments over time.
• As a last resort, you could turn to debt collection agencies. Bear in mind, you might have to pay a fee and there’s no guarantee you’ll get what you’re owed.

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]

How can small businesses avoid not getting paid on time?

Practising good invoicing habits can help you avoid late payments. More than half of businesses spend four or more hours on payment follow-up tasks every single week, according to Chaser’s late payments report. Xero, Chaser, and invoicing technologies can help you streamline payment processes and protect cash flow.

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

As far as getting paid on time goes – it all starts with the invoice. Here are some tweaks you can make to your invoicing process that could help you get them settled faster:

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. Read our guide on the benefits of eInvoicing for more.

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. Ditch the invoice admin, and let software do the work.

Embracing digital payment solutions

Dealing with late payments is stressful and time-consuming. 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 – rest assured. With Chaser and Xero, you can customise automated follow-ups to be friendly and personable so they still sound like you.

Say goodbye to late payments 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. Free of unnecessary admin, you can focus on the stuff that lights you up in your business.

Looking for more ways to improve cash flow? Head to our cash flow content hub for practical tips and guidance.