Late Payments Are Crushing Small Businesses: Here’s What You Can Do About It

Late Payments Are Crushing Small Businesses: Here’s What You Can Do About It 
Updated July 2026

Late payments are one of the biggest cashflow killers for small businesses. 

You’ve done the work. You’ve delivered the service. You’ve paid your team, covered your costs, and kept your side of the bargain. 

Then the invoice just sits there. 

Unpaid. 

And suddenly, instead of focusing on growth, strategy, or actually running the business, you’re chasing money you’ve already earned. 

Sound familiar? 

You’re not alone. Late payment remains a huge issue for UK small businesses, and it can cause real strain: on cashflow, on supplier relationships, on confidence, and on your own headspace as the business owner. 

The good news? The law is on your side. And with the right process, you can chase payments in a way that protects your relationships while making it clear that late payment is not okay. 

What the law says 

The Late Payment of Commercial Debts legislation gives businesses a statutory right to charge interest and claim compensation when another business pays late. 

This applies to business-to-business transactions, unless your contract already includes a fair and substantial remedy for late payment. 

Here’s what you can usually claim: 

• Statutory interest at 8% per year above the Bank of England base rate  

• Fixed compensation of:  

• £40 for invoices up to £999.99  

• £70 for invoices from £1,000 to £9,999.99  

• £100 for invoices of £10,000 or more  

• Additional reasonable recovery costs if your costs are higher than the fixed compensation amount  

You can read the full government guidance here: 
GOV.UK – Late commercial payments: charging interest and debt recovery

When does a payment become “late”? 

This depends on what you agreed with your customer. 

If you agreed a payment date, the invoice becomes late the day after that date. 

If you didn’t agree a payment date, payment is usually late 30 days after the later of: 

• the date the customer receives the invoice; or  

• the date the goods or services are delivered.  

Public sector clients usually have to pay within 30 days. Many business-to-business arrangements use 30 or 60 days, although the government is now moving towards tighter rules on long payment terms. 

Example: how to calculate statutory interest 

The interest rate changes when the Bank of England base rate changes, so always check the current rate before calculating late payment interest. 

As an example, at the time of updating this article, the Bank of England base rate is 3.75%. That means statutory interest would be: 

3.75% + 8% = 11.75% per year 

So, if your business is owed £2,000 and the invoice is 40 days late, the calculation would be: 

£2,000 × 11.75% ÷ 365 × 40 = £25.75 

You could then add the fixed compensation amount. 

For a £2,000 invoice, the fixed compensation is £70, so the total late payment charge would be: 

£25.75 interest + £70 compensation = £95.75 

You can keep charging daily interest until the invoice is paid. 

If you decide to charge interest, you should usually send an updated invoice or clear statement showing the interest and compensation being added. 

The government is tightening the rules 

The UK government has been looking closely at late payment practices, particularly where large businesses delay payment to smaller suppliers. 

In March 2026, the government published its response to the late payment consultation. The proposed changes include a maximum standard payment term of 60 days, reducing to 45 days after five years, subject to further consultation. 

A Late Payments Bill has also been introduced to Parliament, with proposed measures including: 

• stronger powers for the Small Business Commissioner;  

• potential financial penalties for persistent late payers;  

• clearer rules around when invoice disputes can be raised;  

• mandatory statutory interest on late payments;  

• more transparency around payment practices; and  

• greater board-level accountability for large companies with poor payment performance.  

These changes are designed to shift late payment away from being seen as “just how business works” and towards something that customers, finance teams and boards have to take seriously. 

But here’s the important bit: 

You don’t need to wait for new laws to start protecting your cashflow. 

You can take action now. 

The real problem with late payments 

Late payment isn’t just a finance issue. 

It affects everything. 

It can mean: 

• delaying your own supplier payments;  

• dipping into savings or overdrafts;  

• struggling to pay wages or tax bills;  

• losing confidence in your numbers;  

• wasting hours chasing invoices;  

• feeling awkward, frustrated or embarrassed;  

• making decisions from panic rather than clarity.  

And that’s the bit we really care about. 

Because when cashflow feels out of control, it doesn’t just hit the bank balance. It hits the business owner. 

You start second-guessing everything. 

Can I afford to hire? 
Can I pay myself? 
Can I invest in the business? 
Can I take a holiday? 
Can I sleep tonight? 

That’s why having a proper payment process matters. 

Not because you want to be difficult. 

Because you deserve to be paid for the work you’ve done. 

A simple four-stage chasing process 

A professional, consistent process is usually far more effective than random, emotional chasing. 

Here’s a simple structure you can use. 

Stage	Timing	Tone	Purpose
1. Pre-due reminder	3–5 days before due date	Friendly and proactive	Keeps the invoice visible
2. Gentle nudge	1–5 days after due date	Courteous and assumptive	Assumes goodwill
3. Firm reminder	7–14 days overdue	Clear and factual	Signals consequences
4. Final demand	21+ days overdue	Direct and professional	Creates urgency

The key is consistency. 

If you only chase when you’re desperate, the customer learns that your payment terms are flexible. 

If you have a calm, structured process, the customer learns that you take payment seriously. 

Example tone progression 

3–5 days before the due date 

Hi [Name], 

Just a quick reminder that invoice [1234] for £[amount] is due on [date]. 

I’d be grateful if you could confirm this is scheduled for payment. 

Many thanks, 
[Name] 

1–5 days after the due date 

Hi [Name], 

I hope you’re well. 

I’m just following up on invoice [1234] for £[amount], which was due on [date]. 

Could you please confirm whether this has been scheduled for payment? 

Many thanks, 
[Name] 

7–14 days overdue 

Hi [Name], 

Invoice [1234] for £[amount], due on [date], still appears to be outstanding. 

Could you please confirm when payment will be made? 

As a reminder, under the Late Payment of Commercial Debts legislation, we reserve the right to apply statutory interest and compensation to overdue invoices. 

I’d be grateful if you could arrange payment as soon as possible or let us know if there is a genuine query with the invoice. 

Many thanks, 
[Name] 

21+ days overdue 

Hi [Name], 

Despite previous reminders, invoice [1234] for £[amount], dated [date], remains unpaid. 

We have calculated statutory interest and compensation of £[amount], bringing the total now due to £[amount]. 

Unless payment is received within seven days, we will need to consider formal recovery action. 

Please contact us immediately if there is anything preventing payment. 

Regards, 
[Name] 

Why this works 

This approach works because it removes the emotion. 

You’re not chasing from a place of panic. 
You’re following a process. 

That matters because: 

• Politeness keeps the relationship intact. Most customers are not trying to be difficult. Sometimes invoices have genuinely been missed.  

• Clarity removes excuses. Always include the invoice number, date, amount and due date.  

• Consistency builds credibility. If you say you’ll follow up, follow up.  

• Consequences create urgency. Mentioning statutory interest and compensation can help remind customers that late payment has a cost.  

• Automation saves energy. The business owner should not have to manually remember every overdue invoice.  

Late payment chasing shouldn’t become your Friday-night job. 

Practical steps to protect your cashflow 

Here are some simple steps you can put in place. 

1. Set clear payment terms upfront 

Make sure your terms are clear before work starts. 

Your engagement letter, proposal, contract or terms and conditions should explain: 

• when invoices will be issued;  

• when payment is due;  

• how payment should be made;  

• whether you use direct debit or standing order;  

• what happens if payment is late.  

Don’t hide this in tiny print. Payment expectations should be clear from the beginning. 

2. Put payment terms on every invoice 

Every invoice should show: 

• the due date;  

• the payment methods;  

• bank details or payment link;  

• invoice number;  

• any purchase order reference required by the customer;  

• your late payment wording.  

You could add wording such as: 

We reserve the right to charge statutory interest and compensation on overdue invoices under the Late Payment of Commercial Debts legislation. 

3. Make it easy to pay 

The easier you make payment, the faster you’ll usually get paid. 

Consider using: 

• payment links;  

• direct debit;  

• card payments;  

• GoCardless;  

• standing orders for recurring work;  

• automated invoice reminders.  

If a customer has to hunt for your bank details or dig through old emails, that creates unnecessary friction. 

4. Automate reminders 

Use Xero or your accounting system to automate polite reminders before and after the due date. 

This means the process runs even when you’re busy. 

It also makes the chasing feel less personal. Instead of you sending a frustrated email at 9pm, the system sends a calm, professional reminder. 

Much better. 

5. Review your debtor days 

Debtor days show how long, on average, it takes your customers to pay you. 

If your debtor days are creeping up, that’s a warning sign. 

It might mean: 

• customers are under pressure;  

• your team isn’t chasing consistently;  

• your payment terms are too generous;  

• invoices are going out too late;  

• there are disputes or quality issues;  

• your customers don’t see payment as urgent.  

This is why debtor days should be part of your regular financial review, not something you only look at when cash gets tight. 

6. Credit-check new customers 

If you’re taking on a large project or giving generous payment terms, consider credit-checking the customer first. 

This is especially important if: 

• one customer would represent a large percentage of your income;  

• you are buying materials upfront;  

• you are using subcontractors;  

• your team will spend significant time before you are paid;  

• the customer has asked for long payment terms.  

A big sale is only a good sale if you actually get paid. 

7. Invoice quickly 

One of the easiest ways to improve cashflow is to invoice faster. 

If you wait two weeks to send the invoice, you’ve already extended the customer’s payment terms without meaning to. 

Build invoicing into your weekly rhythm. 

For example: 

• invoice immediately on completion;  

• invoice upfront where possible;  

• use deposits for larger projects;  

• use milestone billing;  

• bill monthly retainers in advance;  

• review unbilled work every week.  

You can’t chase an invoice that hasn’t been sent. 

8. Deal with disputes quickly 

Sometimes customers delay payment because there’s a genuine issue. 

The problem is when no one tackles the issue properly. 

If a customer disputes an invoice, ask them to be specific: 

• What exactly is being disputed?  

• What amount is disputed?  

• What part of the work does it relate to?  

• What evidence do they have?  

• Will they pay the undisputed amount now?  

Don’t let a small query hold up the whole invoice. 

When should you actually charge interest? 

This is where business owners often get stuck. 

You might be legally entitled to charge interest, but you may not always choose to do it. 

Sometimes a polite reminder is enough. Sometimes the customer has simply missed the invoice. Sometimes it’s a valuable relationship and you want to keep things warm. 

But there are times when charging interest or compensation is completely reasonable, especially where: 

• the customer repeatedly pays late;  

• they ignore reminders;  

• they have poor communication;  

• they are using your business as free credit;  

• the amount is significant;  

• their late payment is putting pressure on your cashflow.  

The key is to have a policy. 

Decide in advance when you’ll apply late payment charges, so you’re not making emotional decisions in the moment. 

A suggested late payment policy 

You could use something like this internally: 

• 0–5 days overdue: friendly reminder  

• 7–14 days overdue: firm reminder and reference to late payment rights  

• 21 days overdue: add statutory interest and compensation  

• 30+ days overdue: stop further work, escalate internally, and consider formal recovery  

• Repeated late payment: review whether the customer remains a good fit  

This is not about being harsh. 

It’s about protecting your business. 

Because if you keep serving customers who don’t pay properly, you’re training them that your payment terms don’t matter. 

The bigger question: is this customer still right for you? 

Late payment is often a symptom of a bigger issue. 

One late payment can happen. 

Repeated late payment is different. 

If a customer consistently pays late, ignores your emails, disputes invoices without good reason, or makes you feel awkward for asking to be paid, it may be time to ask whether they are still the right customer for your business. 

A good customer relationship should involve respect on both sides. 

You deliver the work. 
They pay you on time. 

That’s not unreasonable. 

That’s business. 

Vibrant Late Payment Email Template Pack 

We’ve created a practical guide with ready-to-use email templates, suggested timings and a mini cashflow checklist to help you get paid faster without damaging relationships. 

It’s designed to help you: 

• chase consistently;  

• sound professional;  

• protect your cashflow;  

• avoid awkward wording;  

• know when to escalate;  

• stop late payment becoming a recurring headache.  

Final thought 

Late payments don’t just slow down cashflow. 

They drain time, energy and trust. 

And for many business owners, they create that horrible feeling of being busy, profitable on paper, but still worrying about the bank balance. 

That’s why your payment process matters. 

Clear terms. 
Fast invoicing. 
Automated reminders. 
Consistent chasing. 
Regular cashflow reviews. 
And the confidence to use your rights when needed. 

You’ve done the work. 

You deserve to be paid. 

Need help managing cashflow, reviewing debtor days or setting up automated reminders? 

Talk to the Vibrant team. We can help you design a simple, data-driven cashflow system that gives you clarity, control and a bit more breathing space.