A quick guide to managing late payments
Written by Nicholas Thomas Nicholas, managing director of Pearcelegal Solicitors and Head of the Family and Litigation Department
Late paying customers are one of the most challenging aspects of being a business owner.
According to specialist insurer, Hiscox, in February 2026, UK SMEs were collectively owed £70.4 billion in unpaid invoices and on average, they were owed £12,357 each year in late payments.
Research from Bibby Financial Services shows that late payments prevented 42 per cent of SMEs from paying staff on time in the past year, while nearly a quarter paused hiring. Companies House data reveals that 38 businesses close every day because of late payments.
For owner-managed firms across the West Midlands, late payments have the potential to cripple business growth, and in worst case scenarios, lead to insolvency.
The Government published its Small Business Plan in July 2025, promising the "toughest late payment laws in the G7." But legislation takes time. Below are steps business owners can take right now to recover late payments.
Statutory rights most businesses overlook
The Late Payment of Commercial Debts (Interest) Act 1998 gives any business supplying goods or services to another business the right to charge statutory interest at 8 per cent above the Bank of England base rate on overdue invoices.
With the base rate at 3.75 per cent, that means interest of 11.75 per cent per annum, accruing daily from the date payment falls due.
On top of this, the Act provides fixed compensation of £40 for debts under £1,000, £70 for debts between £1,000 and £9,999, and £100 for debts of £10,000 or more, plus reasonable recovery costs.
Many businesses do not claim these entitlements, often because they fear damaging a trading relationship. The government’s proposed reforms aim to make interest charges mandatory, removing the burden on the creditor to request them. Until that legislation arrives, the rights are there to be used.
Four steps to recovering what you are owed
1 Review your contracts
Payment terms should specify the due date, the interest rate applicable on late payment, and your right to recover costs. Clear contractual terms remove ambiguity and strengthen your position from the outset.
2 Chase promptly
When an invoice becomes overdue, a firm reminder followed by a formal demand letter setting out the debt, accruing interest, and compensation claimed can resolve many disputes before they escalate.
3 Issue a Letter of Claim
If informal approaches fail, a formal Letter of Claim is the next step. Where the debtor is an individual or sole trader, the Pre-Action Protocol for Debt Claims requires specific information and prescribed enclosures.
For claims between companies, the Practice Direction on Pre-Action Conduct requires a letter before action and reasonable time for the debtor to respond.
4 Know when to escalate
Where a debtor does not engage, court proceedings may follow. For undisputed debts, a County Court Judgment can be obtained relatively quickly. Enforcement options include charging orders over property and, in appropriate cases, insolvency proceedings.
What the government plans to change
The key proposals in the Small Business Plan are:
- A statutory cap on payment terms at 60 days, reducing to 45 days over five years.
- Mandatory interest on late payments at the statutory rate, with no ability for larger firms to negotiate it away.
- A 30-day deadline for buyers to dispute invoices, preventing disputes raised months later as a delay tactic.
- New enforcement powers for the Small Business Commissioner, including the ability to impose financial penalties on persistent late payers and conduct spot checks on payment reporting data.
The Fair Payment Code, launched in December 2024, already allows businesses to check whether a prospective customer holds a Gold, Silver, or Bronze award for payment practices. It is a useful due diligence tool when taking on new clients.