Late payments can lead to serious cash-flow issues for small and medium-sized businesses. Even if a customer intends to pay eventually, delays can hinder a business’s ability to cover its costs, pay suppliers and employees, and plan for future growth.
For SMEs in particular, having effective payment terms and a straightforward process for managing overdue invoices can make a significant difference. Proactively addressing payment issues before they become overdue can also reduce the likelihood of disputes arising.
This month, we look at practical steps businesses can take to protect themselves from late payments and what they can do when a customer does not pay on time.
Establish Clear Payment Terms From the Start
One of the easiest ways to reduce late payments is to make payment terms clear before providing goods or services. Your contract or terms and conditions should set out when payment is due, how invoices should be submitted, and the consequences of late payment.
A business may, for example, stipulate that invoices must be paid within 30 days of the invoice date. The agreement should also set out any requirements that could affect when payment becomes due, such as approval procedures or the completion of certain stages of a project.
Payment terms should be agreed at the outset and be consistent with the terms stated on invoices.
Send Invoices Promptly and Accurately
An incorrect or delayed invoice can create unnecessary payment disputes, even when a customer has agreed to pay within a specified timeframe.
Invoices should include all information required by the contract and be sent to the correct person or department. Businesses should check the amount, payment deadline and bank details, as well as any purchase order or reference number required by the customer.
For larger customers, understanding their invoicing procedures before work begins can help prevent unnecessary delays.
Consider Credit Checks and Payment History
Before entering into a significant contract, businesses should assess whether the customer is likely to pay on time. This is particularly important when the business will incur substantial costs before receiving payment or when entering into a long-term relationship.
Depending on the circumstances, this may involve conducting a credit check, reviewing publicly available information or considering previous payment history.
For higher-risk customers, businesses could consider requesting a deposit, arranging staged payments or seeking other forms of security.
Keep Track of Your Invoices
It is essential for businesses to have a system in place to monitor outstanding invoices and identify approaching or missed payment deadlines.
Instead of waiting until an invoice is significantly overdue, consider contacting the customer shortly before the due date, where appropriate. A simple reminder can resolve an administrative issue before it escalates into a payment dispute.
Once an invoice becomes overdue, businesses should follow up promptly and maintain a record of all communications. Maintaining accurate records of invoices, contracts, delivery of goods or services, and correspondence can be particularly important if formal recovery action later becomes necessary.
What Steps Can You Take When a Payment is Late?
If a customer does not pay by the agreed deadline, the first step is usually to contact them to establish why payment has not been made. There may be a simple explanation, such as an invoice being sent to the wrong department.
If there is a genuine dispute over the invoice, businesses should clarify exactly what the customer disputes and review the relevant contractual terms. This can help distinguish a genuine contractual dispute from a customer simply delaying payment.
Where there is no valid dispute, the business can request payment and clearly state that the invoice is overdue. Depending on the situation, the business may also have a contractual or statutory right to charge interest and recover certain costs associated with late payment.
Is it Possible to Charge Interest on Late Payments?
The Late Payment of Commercial Debts (Interest) Act 1998 can, in certain circumstances, allow businesses to claim statutory interest on qualifying commercial debts. Statutory interest is generally calculated at 8% above the Bank of England base rate. Businesses may also be able to recover fixed compensation for the cost of recovering a debt.
However, the statutory regime does not apply in every situation. The contractual and legal position should therefore be checked before any interest or recovery costs are claimed.
Upcoming Changes to Late Payment Rules
Businesses should also be aware of proposed changes to the law governing commercial payments. The Government introduced the Commercial Payments Bill in May 2026 to tackle late and poor payment practices and improve cash flow for smaller businesses.
The proposed reforms include a maximum 60-day payment term for certain business-to-business transactions, mandatory interest on late payments at 8% above the Bank of England base rate, and a new time limit for raising disputes about invoices. The Bill also proposes additional powers for the Small Business Commissioner to investigate poor payment practices and to adjudicate certain disputes.
These measures are not yet in force and will be subject to the legislative process and a transition period. Businesses should therefore continue to comply with the rules currently in force while keeping their payment terms and contracts under review as the new legislation develops.
What Should You Do If the Customer Still Doesn’t Pay?
When informal reminders fail to secure payment, a business may need to take more formal action. This could start with a formal letter before action, which sets out the amount owed, the basis of the debt and the steps the customer must take to avoid further legal action.
A letter before action can sometimes resolve a dispute without resorting to court. It also gives the customer an opportunity to raise any genuine issues and shows that the business has taken reasonable steps to resolve the matter.
If payment is still not made, court proceedings may be necessary. Before starting a claim, businesses should consider the strength of their evidence, the amount owed, the likely costs, and whether the customer can pay any judgment obtained.
Explore Alternative Dispute Resolution
Not every payment dispute needs to go to court. Negotiation or mediation may offer a quicker, more practical solution, particularly when the business wants to preserve its relationship with the customer.
Businesses should also review their contracts for any dispute resolution provisions that require the parties to follow a specific process before court proceedings can begin.
Key Takeaways for SMEs
Late payments can significantly affect SMEs, but there are practical measures businesses can take to reduce the risk of late payments and protect cash flow.
If a payment becomes overdue, businesses should act promptly, establish whether there is a genuine dispute and consider whether interest or recovery costs can be claimed. If informal attempts to recover the debt are unsuccessful, a formal letter before action, alternative dispute resolution or court proceedings may be appropriate.
Ultimately, establishing clear contractual arrangements from the outset can help businesses avoid uncertainty and reduce the risk of payment disputes. If your business regularly experiences late payments or is dealing with a significant unpaid debt, seeking legal advice early can help you understand your options and choose the most appropriate method of recovery.
Our commercial debt recovery lawyers at Witan Solicitors can advise businesses on drafting and reviewing commercial contracts, payment terms and debt-recovery options, helping them understand their current obligations and prepare for changes to the law.
Contact us today on 0300 303 2071 or email us for more information or advice.
Last Reviewed: Qarrar Somji, October 2026
