Late Payment Laws: Protecting Your Business

In Short

• Late payment can severely affect cash flow, especially for small and growing UK businesses.

• UK law allows suppliers to charge statutory interest and compensation on late commercial debts in some B2B contracts.

• Strong contract payment terms and credit control processes are key to reducing non-payment risk.

Tips for Businesses
Set clear payment terms in contracts, including invoice timing, deadlines, and late-payment interest. Check new customers’ creditworthiness and consider deposits or staged payments for higher-risk work. Issue accurate invoices promptly and monitor due dates. Act early on overdue accounts using reminders and escalation procedures before debts become harder to recover.

Summary
This article explains the legal measures and contractual strategies available to address late payment of commercial debts for businesses operating in the United Kingdom. Prepared by LegalVision, a commercial law firm specialising in advising clients on commercial contracts and debt recovery risk, it outlines statutory rights, payment-term drafting, and practical credit-control steps.

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On this page

• Why Is Late Payment a Problem?
• Late Payment Laws and Measures
• Statutory Interest on Late Commercial Debts
• Challenging Unfair Payment Terms and Practices
• The Fair Payment Code and Small Business Commissioner
• Reporting on Payment Practices
• Prioritising Contracts With Strong Payment Terms
• Should You Include an Interest Clause in Your Contract?
• How Can a Business Reduce Non-Payment Risk?
• Checking Customers Before You Contract
• Following Organised Invoicing and Credit Control Procedures
• Key Takeaways
• Frequently Asked Questions

Getting paid on time is crucial for running businesses across all industries. If customers pay late, it can put severe pressure on your cash flow and cause several financial risks, as well as severe stress. This financial challenge is becoming more common in the modern UK business economy.

There are certain legal measures that provide businesses with ways to deal with late payments, but contractual protections are also crucial. This article: 

• explores the problems caused by late payments; 
• introduces key legal measures designed to help; and 
• provides strategies businesses can use to reduce risk.

Why Is Late Payment a Problem?

Late payments can be heavily damaging for a business, but small and growing companies will often feel it the most. When payments are delayed, it may become challenging for your business to cover vital expenses such as paying your staff wages, rent, and everyday overheads. 

Problems with cash flow can also make it harder for a business to: 

• invest; 
• plan for the future; or 
• grow. 

Late Payment Laws and Measures

In the UK, there are certain laws and measures to help tackle non-payment issues. Late payment continues to impose high costs on the UK economy and disproportionately disadvantages small businesses with limited bargaining power.

Statutory Interest on Late Commercial Debts

The Late Payment of Commercial Debts (Interest) Act 1998 gives businesses a legal right to charge interest on late payments in certain circumstances. The Act applies to certain business-to-business contracts for the supply of goods or services.

Where the Act applies, a supplier can charge interest at 8% above the Bank of England base rate. The law grants this right automatically and does not require suppliers to include it expressly in the contract. The Act also allows suppliers to claim fixed compensation for late payment and, in some cases, a reasonable contribution to debt recovery costs. 

These provisions seek to discourage late payment and reduce the financial burden suppliers face when chasing overdue invoices. 

Challenging Unfair Payment Terms and Practices

Some payment practices may be unfair, particularly where customers impose long payment periods or restrict a supplier’s ability to charge interest.

Put simply, the law allows certain representative bodies to challenge payment terms or practices they see as seriously unfair. This means unusually long payment periods may be challenged if they are considered unfair. If a court upholds the challenge, it can prevent the customer from relying on those terms, offering protection without requiring individual suppliers to bring claims themselves.

The Fair Payment Code and Small Business Commissioner

The Fair Payment Code is a voluntary scheme that seeks to encourage businesses to adopt responsible payment practices and pay suppliers within clear timeframes.

Businesses are able to apply for Bronze, Silver or Gold status, depending on how quickly they pay invoices. Though this code does not create legal rights, it can influence behaviour through imposing reputational pressure.

The Small Business Commissioner supports small businesses that are experiencing late payment issues with larger private-sector customers. 

The commissioner: 

• offers advice; 
• considers complaints about payment practices; and 
• publishes reports and recommendations when needed. 

Whilst these actions are not legally binding, such attention can urge businesses to settle disputes and improve how they pay.

Reporting on Payment Practices

Certain large companies and LLPs must report publicly on how they pay suppliers. These reports include: 

• average payment times; 
• standard payment terms; and 
• payment policies.

Prioritising Contracts With Strong Payment Terms

A clear and well-written contract is a key method to lower the risk of being paid late, or not being paid at all. Your contract should clearly define: 

• when invoices are sent by your business; 
• what the payment deadlines are; and 
• what happens if payments are late.

Having a clear process for resolving any invoice disputes may also stop customers from delaying payment without a good reason. 

Taking deposits or upfront payments can also help reduce risk, especially if you are unsure about a certain customer’s payment ability. 

Clear payment terms strengthen a business’ position if disputes arise, so you can clearly highlight evidence in your contract regarding the payment terms you agreed to. 

Should You Include an Interest Clause in Your Contract?

Although statutory interest under the Act is a useful legal right, it does not apply in all situations. For example, statutory interest may not be available if a contract falls outside the law’s scope or already includes a late-payment provision that provides a substantial remedy.

Adding a clear interest clause to your contract can: 

• give you more certainty; 
• set out an agreed right to charge interest on late invoices; and
• give you more flexibility.

Statutory interest is simple interest only, but a good contract clause can allow for compound interest, which may better reflect the real cost of late payments.

 In practice, including robust contract interest clauses often helps to recieve payments on time. Reminding customers that interest is building under a contract may encourage them to pay without you needing to enforce your rights or take further action.

It may also be that your business customers negotiate to agree to a lower contractual interest rate. 

However, it is important that you take legal advice on your specific circumstances and which route may be best for your business. 

How Can a Business Reduce Non-Payment Risk?

Legal protections and contracts are important, but taking steps to prevent late payments is essential. Legal avenues for recovering late payments may: 

• take time; 
• cost money; and 
• come with risk.

Businesses can use a range of practical measures to lower the risk of late or missed payments. 

Checking Customers Before You Contract

Before working with a new customer, you should conduct crucial financial checks. Looking into a customer’s trading history and running credit checks can help to predict if they will pay on time.

By spotting risks early on, you may want to change payment terms to mitigate risk or just avoid risky customer relationships altogether.

Following Organised Invoicing and Credit Control Procedures

Invoices should be issued promptly and accurately upon delivery of goods or services. Delays or errors can give customers reasons to withhold payment.

You should also keep track of payment dates and have a strong credit control procedure in place. Many businesses use invoicing software to sustain consistent credit control and prevent small delays in payment from escalating. 

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Key Takeaways

Late payment is a big problem for UK businesses. The law offers protection through: 

• statutory interest; 
• transparency rules; and 
• certain types of special support. 

However, businesses should still focus on contractual protection and practical steps to help prevent payment delays. 

If you need help in drafting your commercial contracts, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced disputes and litigation lawyers help businesses across industries manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.

Frequently Asked Questions