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How to tackle late payments

What do you do if a client payment is late?

As a small business, late payments from clients are often a problem. When a staggering 62 percent of SME invoices are paid late*, it often results in cash-flow problems as well as time wasted chasing payments. But what steps should you take if your client is reluctant to pay and what are your rights?

First steps

If your payment deadline has passed, send the client a polite but firm reminder email and try calling their accounts department (if they have one). Often a late payment is just an oversight and can be resolved quickly.

If you don’t receive a satisfactory response, the next step is to write to them claiming compensation for late payment. Make sure you keep copies of all the reminders they have been sent.

Claiming back interest for late payments

Legally, for business transactions and public authorities, a payment is classed as late if it is not paid within 30 days of invoicing (unless agreed otherwise) as long as the client has received the invoice and the goods or service have been delivered. Late Payment Interest is a penalty fine you can charge for each day a payment is overdue. For late payments on business to business transactions, the annual statutory interest rate is 8% plus the Bank of England base rate.

Example from www.gov.uk. If your business is owed £1,000 and the Bank of England base rate is 0.5%:

  • the annual statutory interest on this would be £1,000 x (8% + 0.5%) = £85
  • divide £85 by 365 to get the daily interest: £85 / 365 = 23p a day
  • after 50 days this would be 50 x 23p = £11.50

A handy calculator is also available on the Contractor Calculator website.

If you are adding interest to the amount of money owed, you will need to issue a new invoice. It’s advisable to send an accompanying letter stating that if the client doesn’t pay within a certain time (e.g. 5 days) they will be charged the late payment interest which will continue to accrue until the whole debt has been paid.

Fixed Debt Recovery Cost

On top of interest, you can also charge a fixed debt recovery cost for the late payment:

Amount of debt What you can charge
Up to £999.99 £40
£1,000 to £9,999.99 £70
£10,000 or more £100

Hopefully, issuing a reminder with late payment fees added in should prompt the client to pay. But if they still refuse, you can threaten to take them to court.

Taking Debtors to Court

If you’ve sent the client multiple reminders to pay and as long as the debt is from within the past six years, you can take the matter to court.

Before starting proceedings, you must write to the client to let them know you are about to start legal action - this may well prompt them to pay up. As detailed in this Experian article, the letter should contain the following:

  • Details of the outstanding debt
  • Final payment deadline
  • The circumstances relating to the debt
  • The basis of the claim and details of the breach of contract
  • The amount owed, how this has been calculated and any interest due
  • How long they have to pay the debt (this period should be reasonable - 14 days is common)
  • Any documents relevant to the matter

Finally, the letter should state that if payment is not received within the stipulated period, proceedings will be commenced.

If you are forced to start court proceedings, there are three tracks for claims in civil court:

  • Small claims track - for claims of up to £10,000
  • Fast track – for claims £10,000 to £25,000
  • Multi track – for claims over £25,000

Making a small claim

For small claims, the process is relatively simple and you shouldn’t need a solicitor. The paperwork can be filled out online at moneyclaim.gov.uk. There are court costs involved which increase with the size of the claim – full details can be found at www.gov.uk.

Making a larger claim

If you are making a larger claim through the fast or multi track, it’s best to contact a solicitor for advice as taking it to court is more complicated and could end up being costly. Depending on the position of the client, there is unfortunately no guarantee you will be able to recoup the debt or your court costs, so whether to pursue a court case requires careful consideration.

For more information on taking a debt to court, visit The Citizen’s Advice Bureau website or this helpful leaflet from HM Courts and Tribunals Service.

Is taking a client to court the only option?

Hopefully your client will settle the debt before it gets as far as legal proceedings, but there is another option. Alternative Dispute Resolution aims to find a solution without taking a matter to court, provided both parties are willing to participate. If a case is too large for the small claims court but is straightforward, arbitration can be a cost-effective way of finding a resolution minus the court costs. A detailed explanation of Alternative Dispute Resolution is available at the Citizen’s Advice website.