Customers paying late? Your rights and how to get paid faster

You did the work, sent the invoice and waited. The due date passed, and the money didn't arrive. Meanwhile your own bills, wages and tax are due on time.

Late payment is so common that many businesses treat it as normal. It doesn't have to be. This guide covers your legal rights, a routine that gets most invoices paid on time, what to do when a customer won't pay, and how to stop late payers draining your cash in the meantime.

Your rights when a business customer pays late

The Late Payment of Commercial Debts (Interest) Act 1998 applies when one business supplies goods or services to another under a contract. It doesn't cover sales to consumers. When a business customer pays late, it gives you two rights.

Statutory interest. You can charge interest on the overdue amount at 8% a year above the Bank of England base rate. The base rate used is fixed for six months at a time: the rate on 31 December applies from January to June, and the rate on 30 June applies from July to December. Interest runs from the day after payment was due until the day you're paid.

Fixed compensation. You can also claim a fixed sum for each late invoice, to cover the cost of chasing it:

If your reasonable costs of recovering the debt are higher than the fixed sum, you can claim the difference as well.

You don't need to have mentioned these rights in your contract to use them. A contract can set its own late payment interest instead, but only if it gives you a "substantial remedy", which a token rate won't. The details, and a calculator for the interest, are on GOV.UK's guide to late commercial payments. This is general information, not legal advice.

When payment is legally due

If you agreed payment terms with the customer, those terms apply. If you didn't agree any, the law sets a default of 30 days after the later of two dates: when the customer received the goods or services, or when it received your invoice.

Between businesses, you can agree terms longer than 60 days, but only if they're expressly agreed and aren't grossly unfair to you, the supplier. For public sector customers the limit is generally 30 days. The government has consulted on tougher rules on late payment, so check GOV.UK for the current position.

The practical lesson: put a payment term on every quote, contract and invoice, and show the due date as a date, such as "Due 14 March", not "30 days". It removes room for argument.

A worked example. Say a customer pays a £6,000 invoice 40 days late. If the Bank of England base rate in force were 4%, the statutory rate would be 12% a year. The daily interest is £6,000 × 12% ÷ 365, or about £1.97, so 40 days comes to about £78.90. Add £70 of fixed compensation for a debt of that size, and you could claim about £148.90 on top of the £6,000. This is an illustration: the base rate, and so the interest, will differ.

Should you actually charge it? That's your call. Some businesses add it as a matter of course. Others mention it when an invoice goes overdue and waive it if the customer pays promptly. Either way, knowing you have the right gives your chasing more weight.

Credit control that prevents late payment

Most late payment is avoidable. These habits make the biggest difference.

Before you start the work:

• Check new customers. A credit report on a business costs little and tells you whether it pays its suppliers on time. Our guide to business credit scores explains what the reports show.
• Agree terms in writing, including the payment period, how to pay and what happens if payment is late.
• Ask for a deposit or staged payments on large or long jobs, so you're never too far out of pocket.
• Find out how the customer's approval works. Many larger businesses won't pay without a purchase order number, or until a named person has signed the invoice off.

When you invoice:

• Invoice straight away, ideally the day the work is delivered. Every day's delay is a day added to when you're paid.
• Get the details right. Purchase order number, due date, your bank details and a clear description. A query is the easiest reason a customer has to delay.
• Send it to the right person, and confirm it's arrived and been approved.

After the due date:

• Chase on a schedule, not when you happen to remember. The diagram below shows a typical routine.
• Phone as well as emailing. A call to a named person in accounts gets answers an email often doesn't.
• Stop supplying if your terms allow it. Continuing to deliver to a customer who isn't paying only increases what you're owed.

When chasing doesn't work

If a customer still hasn't paid after your final reminder, it's time to step up. Before you do, consider whether the customer can pay at all. Winning a court case against a business that's insolvent rarely gets you your money.

Send a letter before action. This is a formal letter, sometimes called a letter before claim, that sets out what's owed, including any statutory interest and compensation, and says you'll start court proceedings if it isn't paid by a set date. In England and Wales, courts expect you to give the other side a reasonable time to respond before you issue a claim, often 14 days between businesses. If your customer is a sole trader, a specific pre-action protocol for debt claims applies, which requires particular information and gives them 30 days to respond. A letter before action alone often prompts payment.

Make a court claim. In England and Wales, you can make a money claim online through GOV.UK. Claims of up to £10,000 usually go to the small claims track, which is designed to be used without a solicitor. If the customer defends the claim, you'll usually be referred to a free mediation appointment first. You pay a court fee based on the amount, which you can add to what you claim. Scotland and Northern Ireland have their own procedures and limits. Check the current process and fees on GOV.UK's guide to making a court claim for money.

Enforce the judgment if needed. If the court finds in your favour and the customer still doesn't pay, there are further steps, such as using enforcement agents, again for a fee.

For larger or disputed debts, a solicitor or debt recovery agency may be worth the cost. If your customer is a large business, the Office of the Small Business Commissioner may also be able to help with a complaint about payment practices. Details are on GOV.UK.

Getting paid now: invoice finance

Even with good credit control, you'll sometimes wait. If slow-paying customers keep leaving you short, invoice finance lets you borrow against what you're owed.

A provider advances most of an invoice's value, usually within days of you raising it, and the rest, minus its fees, when the customer pays. With factoring, the provider also chases the invoices for you. With invoice discounting, you keep control of collections and customers usually don't know a provider is involved. Some facilities include protection against a customer failing to pay at all, for a higher fee.

It turns your sales ledger into cash as you trade, so a late payer delays the provider's money rather than yours. Our guide to invoice finance vs a business loan compares the options, and working capital explained shows how payment terms affect the cash a business needs to run. If you need money in days rather than weeks, see fast business funding.

Common mistakes to avoid

• Waiting to invoice. Invoicing at month end instead of on delivery can add weeks to every payment.
• Vague payment terms. "Payment on receipt" or "30 days" without a date invites argument. Put the date on the invoice.
• Chasing by email only. Emails get ignored. A phone call to a named person often finds the real reason for the delay.
• Carrying on supplying a non-payer. Your exposure grows with every delivery.
• Threatening action you won't take. If your letter says you'll issue a claim on a date, be ready to.
• Letting one customer become too big a share of your sales. If they pay late, your whole business feels it.

Questions people ask

Can I charge interest on a late invoice?

Yes, if your customer is a business. Under the Late Payment of Commercial Debts (Interest) Act 1998, you can charge statutory interest at 8% a year above the Bank of England base rate from the day after payment was due. A contract can set a different rate, but only if it's a substantial remedy for late payment.

How much compensation can I claim for a late payment?

A fixed sum for each late invoice: £40 for debts under £1,000, £70 for debts of £1,000 to £9,999.99, and £100 for debts of £10,000 or more. You can also claim reasonable recovery costs above that amount. Check GOV.UK for the current rules.

What are the payment terms if none were agreed?

If no payment date was agreed, payment is due 30 days after the later of the customer receiving the goods or services and receiving your invoice. Between businesses, terms longer than 60 days must be expressly agreed and not grossly unfair to the supplier.

What should a letter before action include?

It should say what's owed and why, list the invoices, include any statutory interest and compensation you're claiming, and set a clear deadline for payment. It should also say that you'll start court proceedings if the debt isn't paid. Different rules apply if the customer is a sole trader, so check GOV.UK or take advice.

Can I use the small claims court for an unpaid invoice?

In England and Wales, claims up to £10,000 usually go to the small claims track, and you can start a claim online through GOV.UK. You'll pay a court fee, which you can add to the claim. Scotland and Northern Ireland have their own procedures and limits.