Late commercial payments: protect cash flow before chasing becomes urgent

Late customer payments are a banking problem as much as a credit-control problem. They change the date cash reaches the account, increase overdraft use and can force a profitable business to delay suppliers or payroll. The process should begin before the invoice becomes overdue.

Put payment terms, due dates and dispute rules in writing

A business should state the payment period before work begins and repeat the due date clearly on the invoice. GOV.UK guidance on late commercial payment says payment periods for business transactions are normally expected to be within 60 days unless a longer period is expressly agreed and is not grossly unfair. Public authorities are generally expected to pay within 30 days.

Define what happens if the customer disputes part of an invoice. A vague dispute process can delay the entire balance even when only one line is questioned. Keep evidence of delivery, acceptance and any agreed variation so the finance team can establish when payment became due.

Forecast customers according to how they really pay, not the invoice due date

If a customer consistently pays 15 days late, put that behaviour into the cash-flow forecast while still chasing to improve it. An invoice due on 30 September should not automatically appear as September cash if history shows the customer pays in mid-October.

Track debtor days and overdue value by customer. A £25,000 invoice from a reliable customer that is three days late is a different risk from £25,000 spread across several invoices that have been overdue for 90 days. The forecast should show both timing and collection quality.

Understand the statutory interest right on qualifying commercial debt

GOV.UK states that statutory interest on late business-to-business commercial payments is 8 percentage points above the relevant Bank of England reference rate, unless the contract provides a different qualifying interest rate. The reference rate is fixed for six-month periods under the statutory framework.

The standard calculation is simple interest: debt multiplied by the applicable annual rate multiplied by the number of days late divided by 365. For illustration, if the applicable statutory rate for a period were 12 percent, a £20,000 invoice that is 30 days late would accrue about £197.26 of interest. The actual rate must be checked for the relevant six-month period before invoicing the interest.

Know the fixed compensation available for recovery costs

GOV.UK says a supplier can also claim a fixed recovery amount on qualifying late commercial debt: £40 where the debt is under £1,000, £70 where it is £1,000 to £9,999.99, and £100 where it is £10,000 or more. The fixed amount can be claimed once per qualifying payment.

Where reasonable recovery costs exceed the fixed sum, additional qualifying recovery cost can also be claimed under the legislation. Do not add charges casually without checking that the transaction is covered and the contractual position allows the statutory right. Keep the calculation and communication professional because preserving the customer relationship may still matter.

Use a staged collection process before jumping directly to legal action

Start with an invoice reminder before the due date, then a prompt overdue notice, direct contact and a written statement of the balance. Escalate according to value, age and customer response. A customer disputing a genuine delivery issue needs resolution, while a customer ignoring repeated undisputed invoices needs firmer collection action.

For material debt, decide when the account moves from routine collections to director review, formal demand, debt collection or legal advice. Record the trigger in advance. A disciplined escalation process prevents one large debtor from consuming months of working capital simply because nobody wants to make the relationship uncomfortable.

Connect debtor collection to overdraft use, reserves and finance decisions

Measure how late payments affect borrowing. If customers owe £120,000 overdue while the company uses £80,000 of an overdraft, part of the interest cost is effectively financing customers. That does not mean every debtor can be forced to pay immediately, but it makes the cost of weak collections visible.

Use ageing data in weekly cash reviews and in borrowing decisions. Invoice finance may make sense where good customers routinely pay on long terms; an overdraft may fit shorter timing gaps. But finance should not become a permanent substitute for sending accurate invoices, resolving disputes quickly and chasing overdue debt consistently.

Set a management threshold for concentration as well. If one customer represents 35 percent of all overdue receivables, the risk is not only that one invoice is late. A further delay can distort payroll, supplier timing and borrowing needs across the whole company. Large overdue exposures should therefore be discussed as credit risk, not left solely inside the accounts-receivable queue.