• Late payments could have a significant impact on your cash flow.
  • There are a number of reasons why customers may pay late, including economic challenges, poor management, and disputes.
  • You can try to avoid late payments by setting clear payment terms, sending reminders, and offering payment plans. You could also incentivise prompt payment by charging late payment fees and interest on unpaid invoices.
  • If a customer does not pay their invoice, you can take steps to collect the debt, such as sending a late payment letter, using a debt collection agency, or taking legal action.

Late payments can cause difficulties for businesses of all sizes. In fact, money owed beyond 30 days or 60 days (typically) is so problematic that overdue invoices are responsible for a quarter of all business failures. It’s not just multiple late payments that hurt business owners, either – a single unpaid invoice could quickly start to affect your own cash flow and make it difficult to cover your own bills, or invest in your business.

Late payment letters (a letter before action) and debt recovery through legal action are two ways to try to get a client to pay – but they can be expensive and time-consuming. Even then, there’s no guarantee that your overdue invoices will be paid before real damage is done.

However, there are other steps you can take. Below, we’ll look at how to handle and collect late payments, and how to avoid them in the future.

What is a late payment?

A late payment is the amount of money owed to a business, lender or service provider after the payment due date (or grace period) has passed.

Whether a payment is late depends on the agreed payment terms – in the public sector, terms are usually set at payment within 30 days. In the private sector, you can expect 60-day terms.

Anything longer than that must be agreed upon and must be fair to both businesses.

If there’s no agreement in place, the law states payment should be made within 30 days of the customer either receiving the invoice or delivery of the goods or service (whichever is later). Otherwise, it’s a late payment.

Reasons for late payments

There’s no shortage of reasons for late payments. Some might be more reasonable than others, for example the ongoing economic hangover from the Covid-19 crisis, global supply chain issues, or the war in Ukraine.

There are, however, many less valid reasons for a delayed payment, including:

  • Poor management, such as a client’s unspoken ‘delayed payment’ policy
  • Customer reliance on cheap credit and failure to properly read market conditions
  • Withholding payment to dispute the order.

With interest rates at their highest since 2008, and inflation running at a 40-year record, be cautious of clients operating on large amounts of debt or in price-competitive and price-sensitive markets. As costs soar and/or demand drops, they’ll be under increasing pressure to take their time over supplier payments.

As the recession continues, and interest rates climb to rein in inflation, late payments are likely to continue rising. Our resounding advice to businesses is to proceed with caution.

The impact of late payments on businesses

In 2022, 52% of small businesses in the UK experienced late payments, but there’s nothing new about the damaging effects of late payments to businesses. Even before the latest round of economic challenges, the pressure was mounting: 

When late payment impacts cash flow 

Whatever the reason, when customers pay you late, these commercial debts can turn your accounts receivables into bad debts, causing either a temporary or permanent loss of cash. This loss of cash impacts your financial projections and potentially those of other businesses in your ecosystem in a dangerous cash flow domino effect. 

Here are some of the other implications of running into cash flow problems:

  • You may have to delay paying your own invoices
  • You may have to borrow money to cover your expenses
  • Employees may not get paid on time
  • You may be forced to lay off employees
  • You may not be able to deliver products or services on time
  • Credit may be difficult to get in the future
  • You may find it more difficult to attract new customers and business partners

You may even be forced out of business.

Late payments also cost your business time and money. Organising late payment letters means time taken out of your core business, additional working hours, and any costs incurred from a short-term loan or overdraft to cover the shortfall in income.

Debt collection regulation, late payment fees and late payment interest  

The collection of non-payment of commercial debt is generally covered by law. Legal frameworks exist in some countries relating to when a payment is considered “late”. They also cover the kinds of fees, penalties and interest that can be levied to recoup any additional costs. However, these laws are not applied worldwide.

Below are some common questions regarding late payments.

Q: Can I charge a late payment fee in the UK?  

A: Yes, you can charge a late payment fee on an overdue invoice.

Q: Do I have to tell my customers about late payment fees?

A: You must tell your customers about your late payment fees before they make a purchase. Include your late payment fees in your terms and conditions or by sending them a separate notice.

Q: When can I charge a late payment fee?

A: You can charge a late payment fee if your customer fails to pay their invoice within the agreed payment terms. The agreed payment terms should be clearly stated on your invoice.

Q: How do I charge a late payment fee?

A: You can charge a late payment fee by sending your customer an invoice with the fee added. You should also send your customer a reminder that their payment is overdue.

Q: Should I always charge a late payment fee?

A: It depends. Charges can be a sensitive matter, especially when you’re dealing with loyal, long-standing customers who may have run into some short-term cash flow problems and are temporarily struggling to settle their invoices. It’s probably wise to offer some flexibility in these cases. Even consider waiving some of the fees or creating a payment plan.

Q: Can I also charge interest on outstanding debts?

A: In addition to late payment fees, you can also charge interest on overdue invoices. For example in the UK, the Late Payment of Commercial Debts (Interest) Act 1998 and its 2013 amendment entitle suppliers to collection costs incurred as well as a late payment interest at 8% above the Bank of England base rate.

How much to charge for late payment   

The amount of any late payment fee is set by law, and it depends on the value of the invoice. 

Late payment legislation in the UK sets three late payment bands:

  • For invoices up to £999, the maximum fee is £40. 
  • For invoices between £1,000 and £9,999, the maximum fee is £70. 
  • For invoices over £10,000, the maximum fee is £100.

Chasing a late payment from overseas  

Unfortunately, the Late Payment Act doesn’t extend beyond the UK. Many countries, even entire regions, lack any legislation when it comes to charging late fees for unpaid invoices. 

Your chances of recovery are better if you trade in Europe or North America. For example, the US, UK, Netherlands and Scandinavia have legal frameworks covering late payments. Wherever you trade it’s always sensible to take  professional advice and use a reputable international debt collection agency to save you time, hassle and the expense of pursuing money owed.

In the European Union, legislation first introduced in 1998 supports the statutory right of companies to collect interest for late payments. EU regulations indicate that debtors will be forced to pay interest and reimburse the reasonable recovery costs of the creditor if they do not pay for goods and services on time (60 days for business and 30 days for public authorities). 

For example, you can claim compensation for reasonable costs in recovering the incurred debt as well as an additional late payment fee, depending on the size of the unpaid debt. These terms should be made clear in your customer agreement. The late payment fee will encourage your client to pay now if they want to avoid more costs further down the line. 

Croner’s Reference Book for Exporters is a useful resource for information on trade practices, as are our country reports and collection profiles.  

Act swiftly with a late payment letter  

To avoid late payments getting out of hand, when your customer misses a payment deadline, chase the outstanding invoice quickly and send an unpaid invoice letter. You should include:  

  • Details of both companies (name, address) 
  • Date of your letter 
  • Key contact at your company 
  • Payment references, invoice number 
  • Total owed + interest/penalties (explain these charges if you add them) 
  • Explain clearly that the payment is past its due date and the customer has breached terms 
  • Refer to previous communications 
  • State what happens next, including final payment date and the consequences if your customer still won’t pay (debt collection, associated interest and penalties, legal proceedings).  

Situations such as these should be handled with understanding and tact. Using an intermediary can help maintain good relations in order to mitigate the tension between customer and supplier. 

How a debt collection expert can help

There is only so much you, as a supplier, can do to recover a late payment if there’s substantial distance between you and your client. The global debt collection expertise of a specialist trade credit insurer such as Allianz Trade can help by providing a local presence. 

If the matter does go to court, you’ll need at least the following documentation to make your best case: 

  • The signed contract between supplier and buyer. This can be terms and conditions, a sales agreement, contract of sale, etc. This proves the goods or services were ordered. 
  • Shipping invoices, delivery confirmation, etc. (again, signed) to indicate the goods or services have been provided. 

How to avoid late payments in the first place

The more preparation you put into defining an agreement beforehand with your client, the fewer problems you are likely to have with late payments. There are three important steps to follow:

  1. Assess your customers’ creditworthiness – their ability to pay on time, their credit report, payment history, and reputation. 
  2. Negotiate clear and  appropriate payment terms and set credit limits
  3. Have the terms and conditions reviewed by a qualified solicitor who has experience with import and export.  

Once you’re ready to execute the agreement, be sure the pages are signed and dated (electronically-generated and signed/dated agreements are increasingly acceptable for legal purposes) before any order is placed or work begins. It’s okay to replicate these terms on the back of your invoice, but this alone is not sufficient to prove the validity of the agreement: invoices are issued after an offer has been accepted. Invoices in and of themselves do not signal an accepted agreement.  

Remember: late payment of commercial debts can disrupt your cash flow and lead to insolvency. But overly conservative credit decisions can result in missed opportunities. Striking the right balance is critical to maximising your company's bottom line. Trade credit insurance helps you find this balance by providing information on your customers’ creditworthiness and protecting your company against bad debt.


For a free credit insurance consultation call our UK team, 09:00-17:00 Mon-Fri.