Late payments are a common headache for business owners, with recent research finding that SMEs are paid, on average, 6.1 days late. While this may not seem like a huge delay, the impact of late payments can quickly add up, with over a quarter (27%) of British small and medium-sized businesses being owed between £5,000 and £20,000 in unpaid invoices.

The long term result of clients paying late is wasted time chasing invoices, reduced cash flow and working capital and the potential for those bills to turn into bad debts. Here we’ll look at how SMEs can manage the impact of late payments through credit control and late payment finance.

How to reduce late payment risk

Late payments can arise from a range of circumstances, from simple human error to client cash flow issues. However they arise, though, the impact is the same – your business is left out of pocket while you wait for the client to settle their bills.

The easiest way to manage late payments is to avoid the situation altogether – something that can be helped by robust credit control procedures. 

Credit control is  the process of managing and regulating the amount of credit extended to customers and ensuring the timely collection of payments that you’re owed. It covers a range of activities, including assessing the creditworthiness of potential customers, setting credit limits, monitoring outstanding balances, and implementing effective collection strategies to get paid on time.

Perform Credit Checks On New Customers

Before entering into business with a new client, conduct thorough credit checks to assess their payment history and reliability. While business credit scores won’t tell you everything, they can give you an idea of the client’s history handling debt and repayments. 

There are three main credit reference agencies in the UK you can use: TransUnion UK, Equifax and Experian. In order to approach them, you’ll need the client’s permission and some details via a credit application form, which should include:

• Full name(s) of the business and any names it trades under.
• Full names of the business owner/s.
• The name and contact details of whoever deals with payments or enquiries in the business
• The business registration number
• Requests for consent to approach credit agencies/ banks/ references.

Set Clear Payment Terms

Sometimes payments are late simply because you and your client have different ideas of when the bill should be settled. 

• Make sure you establish clear and concise payment terms before starting any work. 
• Ensure these terms are documented and agreed upon in writing. This includes setting payment due dates, outlining penalties for late payments, and offering early payment discounts​.

Having these terms recorded before and work is started also gives you a firm foundation for resolving any future disputes.

Invoice Quickly and Accurately

It’s best practice to send invoices immediately after delivering goods or services, ensuring they are complete and error-free. Sending it while the work is fresh in the client’s mind minimises the risk of their simply forgetting, while also lowering the chances of disputes over invoice details. 

Online invoicing software, often part of accounting tools, makes this easier, while also giving you a clear digital record of when you sent the invoice.

Make It Easy To Pay

Different clients may prefer to pay in different ways. Provide various payment methods such as bank transfers, online payments, and direct debits to make it easier for clients to pay on time. 

Send Payment Reminders

Set up a schedule for regular payment reminders – automated reminder systems can be particularly effective in maintaining consistent follow-up without overwhelming your staff​ in chasing. Remember, the goal isn’t to harass the client into paying, but to give them a chance to do so – including having an honest conversation about any difficulties they might be having so you can work out a plan that works for both parties.

What to do when your client doesn’t pay

If you have a client who has fallen behind on their bills, don’t panic. This is a common occurrence and there’s a strong likelihood you can resolve it. There are a range of options available, from straightforward reminders to legal action.

How to Chase Late Payments

Chasing late payments is part of life for many SMEs, with 31% of businesses spending between 21-30 hours per month chasing customers.

1. Be Proactive: Start by sending polite but firm payment reminders as soon as the invoice is overdue. Use a combination of emails and phone calls to ensure your message is received and understood. A friendly reminder can often prompt a quick response and payment from the client​, particularly if they have simply forgotten.
2. Follow Up Consistently: If the initial reminder does not yield results, follow up more assertively. Highlight the overdue invoice details, such as the invoice number, amount, and due date. Offer to resend the invoice if necessary and ask for a specific payment date​.
3. Personalise Your Approach: When chasing payments, maintain a personal and professional tone. Building a relationship with the person responsible for payments can help ensure your invoices are prioritised. Personal communication can often resolve misunderstandings and expedite payments​.
4. Know When To Escalate: Before initiating legal proceedings, send a final demand letter to the client. This letter should clearly state the amount owed, the due date for payment, and the potential legal consequences if payment is not received​ (Business Advice)​​ (Aldermore bank)​.
5. Seek Legal Advice: Consult with a legal professional to understand your options and the best course of action based on your specific situation. This could include filing a claim in small claims court for smaller debts or taking more formal legal action for larger amounts​.
6. Court Proceedings: If the debt remains unpaid, you may need to file a lawsuit. Prepare all necessary documentation, including the contract, invoices, and communication records, to support your case in court​.

Financing Options For Late Payments

Your business doesn’t stand still while you’re waiting to get paid – that’s where financing solutions can help plug gaps to keep you moving while you resolve the issue.

Invoice Financing 

Invoice financing allows businesses to unlock the cash tied up in unpaid invoices. By selling these invoices to a finance company at a discount, SMEs can get immediate access to funds without waiting for clients to pay. This helps in managing cash flow more effectively and covers essential expenses such as payroll and supplier payments​ 

Short Term Business Loans 

Short term business loans provide a lump sum that can be used for various operational needs, including managing cash flow gaps caused by late payments. 

At iwoca, we offer flexible financing designed to help SMEs manage cash flow and maintain financial stability.

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Our short-term loans provide quick access to funds, with flexible repayment terms that align with your cash flow. You can borrow between £1,000 and £1,000,000, making it easier to cover immediate expenses without long-term financial commitments. You can repay early without any penalties once your late invoice is settled, helping you save on interest costs.

Late Payments FAQs

What are my rights when a client doesn’t pay?

SMEs have the right to charge interest on late payments and claim compensation for debt recovery costs. The Late Payment of Commercial Debts (Interest) Act 1998 allows businesses to charge statutory interest (currently 8% plus the Bank of England base rate) and recover reasonable costs incurred in the process​

When can I send a statutory demand?

If a client fails to pay within 30 days, you can issue a statutory demand, which gives them 21 days to settle the debt or come to an arrangement. Failure to respond can lead to further legal action, including winding up petitions for companies or bankruptcy proceedings for individuals.

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