Managing Late Payments and Business Debts

Sooner or later all business owners run into at least one client who pays their invoice late – which can completely disrupt their cash flow.

Cashflow problems amid a cost-of-living crisis can really put a strain on your business. Which is why it’s best practice to ensure you have policies in place for when this type of stuff occurs.

Most of the time you’ll find your clients have every intention to pay, they’re just going through a challenging time. In these instances, you can usually talk it through with them and come up with a payment plan. But for those not cooperating, you may have to take things further.

We’ll take a look at the steps you can make to manage any late payments or business debts.

What initial steps should I take to manage late payments?

Recovering debt can feel overwhelming, and a little awkward when you begin to chase clients for payments – so ensuring you have a process in place that stays the same for everyone can be a massive help.

To first step to recovering any outstanding payments is good communication with your clients. You could set up automated payment reminders using text, email, and app notifications or, if you have the capacity to do so, make phone calls ahead of the invoice due date.  

Having a chat with your clients is a good way to pick up on any issues they might be having, helping you to take early action. You might even find they have queries about the amount they owe, or issues with the product or service provided.

Always make your contact details available so clients can get in touch if they’re struggling to pay, and encourage them to be open if they do need help.

If they do go over the due date, contact them immediately (and in some instances be a little assertive) and explain the action you’ll take if you don’t receive the payment.

If your client makes a habit of paying their invoices late you should:

• Consider your relationship with that client – Is it worth carrying the debt if they consistently pay late?
• Ask for payments upfront – If this is a persistent issue, but they are a regular client, see if they can pay upfront before making orders. You might find they order less (as they probably order in bulk if it’s on credit), but fewer orders and upfront payments will equal more for your business if it means avoiding debt.
• Keep your promises – Each time there is a late payment, always act on the consequences laid out. For example, if you say you’ll add on a late fee after 30 days, ensure that gets added, and a new invoice is immediately sent to your client. Or if they have some form of membership access to resources, restrict their access and let them know they’ve been restricted until payment is made.

How do I manage my cash flow when dealing with late payments?

No matter how organised your business is, just a few late payments from clients can mess up your cash flow and even cause you to come up against payment problems of your own. Regularly monitoring your cash flow forecast will help ensure you’re where you’re meant to be.

If you think you may already have cash flow problems, speak to your bank as soon as possible to discuss your options. While it may seem scary, they are there to help! If it’s a supplier you can’t pay, chat with them about a payment plan or see if there are any other options they’d suggest.

How can I recover the debt a client owes me?

There are different ways you can recover a client debt, from a simple warning letter to bringing in the small claims court.

Debt recovery agent

Sometimes a simple letter from a debt recovery agent is enough to receive your payment from the debtor. This does come at a price though, with most agencies charging around 10% of the recovered debt.

Court proceedings

If you’re in England or Wales, you can visit your local county court to file claims for debt recovery. If the court rules in your favour, it’ll need to be enforced, which could involve seeking further court orders – so this option is a bit costly!

Mediation and arbitration

This is where you try to resolve the situation (without needing to instigate  court proceedings) by using a mediation or arbitration service. Mediation services give you and the debtor options to help resolve the situation between all parties by acting as a neutral sounding board, but they don’t decide the outcome themselves. This could be a good way to avoid any legal costs.

The Small Business Commissioner

If you’re a small business with less than 50 employees, and you’re owed money by a larger business with 50 or more employees, you can chat with the SBC (The Small Business Commissioner). They’ll gather evidence from both your company and the debtor’s, deciding on a fair outcome.

This isn’t ‘legally binding’, but it highlights poor payment practices from a larger business – which could give them a push to pay you what they owe.

Recruit the help of a solicitor

If none of these work for you, you can always seek legal advice from a solicitor.

There are things to consider before you take action:

Taking legal action against a client can be a big deal – so there are some things to consider first!

• Do you think the debtor is able to pay the debt? (If you spend lots of money on court cases etc., and they physically can’t pay, you may end up putting yourself in even more debt with no outcome).
• Have you exhausted absolutely every option to chase payment?
• Is it worth damaging your relationship with the debtor?
• Is there a reason they aren’t paying it, or do they have reasonable grounds to dispute it?

Claim interest or compensation on any late payments

If a business customer is late paying what they owe, you can legally charge them 8% above the Bank of England’s base rate. You can also claim compensation for any invoice paid late or outside of an agreed deadline.

This is the current rate you can charge depending on the debt owed to you:

Managing late payments can be extremely stressful, if you need more support and advice, visit our online information centre.