Late Payments: Business Advice

This article is not intended as legal or financial advice. You should seek the assistance of a qualified accountant or lawyer when it comes to dealing with business debt.

You want to feel in control of your business. But you can’t force your commercial buyers to pay you on time – and it’s a growing source of frustration the longer the debt remains.

You’re never completely powerless in this situation, no matter how disheartening it feels. For instance, you can charge interest on outstanding invoices, and even add on a penalty for the cost of recovery. The Late Payment of Commercial Debts (Interest) Act 1998 is just one of your options for taking charge of this stressful yet all-too-common scenario.

On the other hand, adding interest on top of a bill that’s lying ignored on a desk may not resolve the issue. Perhaps you’ve already made your mind up on the overdraft versus invoice finance debate –and neither is your cup of tea.

That’s why we’ve put together some advice on strategies to tackle unpaid invoices.

What classes as a late payment?

Late payment is defined by government legislation as follows:

• If you have agreed on a payment date, the payment is considered late if it has not been made within 60 days of that date for business transactions, and 30 days for public authorities.
• If you have not agreed on a payment date, the payment is considered late if it has not been made within 30 days of receiving the invoice or delivery of goods or services, whichever is later.

How to deal with a late payment

60 seconds with fintech leader, Andrea Varga

We spoke to Andrea Varga, Head of Innovation at financial software firm Aryza, for guidance on the sticky subject of overdue bills.

Tip one: Clarify your invoicing

It’s critical to ensure you’re doing everything you can to set your payer up for a smooth transaction. That means sending an accurate, detailed invoice containing your payment terms. This way you can cut out confusion and unnecessary quibbles over billing.

“Ensuring that invoices are accurate, clearly itemised, and promptly delivered can minimise misunderstandings and delays in payment,” shares Varga. Ask yourself if you can include more payment methods, and clearly communicate those in your invoice.

Even so, you can take all the right steps and your buyer sometimes still won’t make you whole. Then it’s time to rectify your own debts – which brings us to the next tip.

Tip two: Proactively seek solutions

“When it comes to unpaid debt, it is essential for small businesses to take a proactive and strategic approach,” confirms Varga. “A multi-faceted strategy is paramount,” she adds, meaning there is more than one course of action you need to take to get ahead of knock-on consequences. After you have clearly communicated with your debtor to state your payment terms, it’s time to seek outside assistance.

“Engaging with a legal or financial professional who specialises in debt collection and insolvency matters can also provide invaluable support. These experts can guide you through the legal frameworks surrounding bailiffs and provide tailored advice to safeguard your business’ interests.” And if the thought of legal action makes your blood run cold (who needs solicitors’ fees on top of outstanding debt, after all?), there may be ways to avoid court altogether.

“Exploring alternative dispute resolution methods, such as mediation or arbitration, may offer a less adversarial route to resolving payment disputes, potentially preserving important business relationships.”

Tip three: Be open with lenders

In truth, it can feel shameful to face the harsh truth of your business’ cash flow. It seems like denial is the only way to cope with the stress. Yet an open approach is more likely to lead to a successful resolution. Banks are no strangers to the financial woes of small businesses. Honesty is surely the baseline expectation of your investors, so sticking your head in the sand is no real solution.

“Open lines of communication with creditors are essential,” advises Varga. “Transparent and honest conversations about your financial situation can often lead to mutually beneficial solutions, such as renegotiating payment terms or creating a manageable repayment plan.

“Demonstrating your willingness to address the issue head-on can foster goodwill and potentially avert more serious consequences.”

How much interest can your business charge on a late payment?

Improved legal protection has come into play so that owners of any sized business can collect interest on outstanding debts. The interest is 8% above base rate, which is chargeable from the day after the final payment date. This applies to almost any sale of goods or services between businesses. So the good news is you’re likely to be covered.

As well as interest on the debt itself, you are also entitled to payment for the cost of collecting the debt. For instance, you may hire a debt collection agency to pursue the missing money on your behalf. The compensation amounts are fixed, and somewhat low. However, they are only meant to act as a deterrent to late payment, and come on top of (not instead of) the interest charges. These are:

• £40 for debts of under £1,000
• £70 for debts between £1,000 and £10,000
• £100 for debts of more than £10,000

It’s worth knowing that you could claim back further debt recovery expenses. So make sure you keep all the receipts of any costs related to this process.

How common are unpaid invoices?

Unfortunately, it’s extremely common for UK businesses to suffer late payments, so much so that they become the norm. But if you’re still waiting on income, how can you balance the books to meet your own payment deadlines? It’s a vicious cycle.

Sky-high energy prices, the increased cost of borrowing, and budget-conscious consumers are only adding to pecuniary pressures. Taking out another loan can be the only way forward for many. But there’s only so much a business can borrow, and unpaid bills are not sustainable.

So widespread are business payment delays that the government is carrying out a review. It aims to investigate poor practice, dispute resolutions, and the ways banks or technological solutions could help. Unfortunately the FSB’s latest report is pretty scathing of such processes, arguing they are slow and ineffectual.

In the meantime, let’s look at ways to prevent and resolve these issues.

How to manage debt within your business

60 seconds with debt mediation expert, Mike Smith

While you’re awaiting revenue, you may find your business balance sheet sliding into the red. We asked Mike Smith, Co-Founder and Director of Company Debt Ltd for advice on dealing with this stressful scenario. Here are his top tips:

Time to Pay (TTP) arrangement with HMRC

If your debt includes unpaid taxes, you may be eligible for a Time to Pay (TTP) arrangement with HM Revenue & Customs (HMRC). This allows businesses facing short-term financial difficulty to spread their tax payments over a longer period.

Consider an invoice finance solution

Financial services are available where businesses can sell their unpaid invoices to a third-party finance company for a percentage of their value. This can help improve cash flow. The finance company then takes on the responsibility of collecting the unpaid invoices. Factoring and invoice discounting are popular methods.

Seek professional help

Engage with a professional debt advisor or a business finance advisor. They can provide insight into the best solutions available to you, including options like Company Voluntary Arrangements (CVAs). A CVA allows a company with debt problems to reach a voluntary agreement with its business creditors regarding repayment of its corporate debt. It can also offer protection against legal action by creditors.

Know your rights against bailiffs

If you’re concerned about bailiffs, it’s essential to understand your rights and the proper procedures they should follow. In the UK, bailiffs (now commonly called enforcement agents) must provide notice before their visit, and there are restrictions on when and how they can enter your property.

You can’t be imprisoned for owing money to creditors (unless it’s fines, council tax, or other court-related penalties), and there’s a specific process they must adhere to. Familiarise yourself with these procedures, and if a bailiff breaches protocol, report it.