Late payment refers to the failure to pay a debt or invoice by the due date agreed upon between the creditor and the debtor. It can refer to both personal and business debts.

Late payments are responsible for a quarter of all business failures. But even one late payment can cramp your cash flow. Legal measures to recoup the funds can create constraints on your time and resources. A late payment letter may not be sufficient. In this article, we discuss how to handle overdue payments and how to avoid them in the future.

A late payment is an amount of money a borrower sends to a lender or service provider that arrives after the payment due date or a grace period for the payment has passed.

Late payments can stem from a wide array of causes: management problems, market conditions, or even unpaid invoices by one of their own customers. It’s also possible that the customer is holding back payment to dispute the order.

Mandated business lockdowns due to the Covid-19 crisis has spawned a severe, long-lasting rash of late payments. Government support has provided temporary liquidity which helped some companies. However, as these payments come to an end, the number of late payments is likely to remain elevated well beyond the anticipated economic rebound.

Managing an overdue balance effectively is crucial for maintaining healthy cash flows and avoiding the pitfalls associated with late payments. An overdue balance, often resulting from unpaid invoices, can significantly strain business operations. Proactively addressing these balances through clear communication and flexible payment arrangements can mitigate the negative impact on your business. It's essential to monitor these balances closely and engage with customers early to find mutually beneficial solutions.

Severe problems with late payment preceded the Covid-19 crisis, as these examples from 2019 show:

  • In the UK, nearly 1 in 7 SMEs failed to pay wages on time due to cash flow problems according to Intuit Quickbooks.
  • In the US, nearly one third of small business owners said they wait more than 30 days for payments according to Forbes.

Whatever the reason, late payment of commercial debts can turn your trade receivables into bad debts, which amounts to a temporary or permanent loss of cash. That affects your financial projections and potentially those of other businesses in your ecosystem as well.

Late payments also cost your business time and money: writing late payment letters involves additional working hours, and covering the shortfall in income can necessitate a short-term loan or overdraft, for example.

The business debt collection of non-payment is generally covered by law. Legal frameworks exist in some countries that dictate terms relating to when a payment is considered “late” and the kinds of fee, penalty and late payment interest that can be levied to recoup the additional debt collection costs. However, these laws are not applied worldwide.

Your chances of debt 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. 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 base rate of the Bank of England.

In the European Union, legislation first introduced in 1998 supports the statutory right of companies to collect interest for late payments. Simply put, the 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.

Keep in mind that debt collection and its application vary widely from country to country. Some entire regions have no legislation to support suppliers. Late payment letters may be ignored. Croner’s Reference Book for Exporters is a useful resource for information on trade practices, as are our country risk rating reports and debt collection agency profiles available here.

An overdue invoice not only disrupts your cash flow but can also be a sign of deeper financial issues on the customer's end. Implementing a robust process for tracking and managing overdue invoices is vital. This includes setting up automated reminders, having a clear escalation process, and, when necessary, involving a debt collection expert. Early intervention is key to resolving overdue invoices, helping to maintain positive customer relationships while ensuring your cash flow remains uninterrupted.

When your customer misses a payment deadline, chase the outstanding invoice quickly and send an  unpaid invoice letter or late payment letter, including the following information:

  • 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 due 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).

The situation requires understanding and tact. Using an intermediary can help maintain good relations in order to mitigate the tension between customer and supplier.

There is only so much you, a supplier, can do to recover a late payment if you’re half a world away from your client. The global debt collection & recovery expertise of a specialist trade credit insurer such as Allianz Trade can help by providing a local presence, removing language barriers and time zone issues, and reaching out to the customer locally.

If the matter does go to court, you will 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. 

Negotiating clear payment terms upfront is one of the most effective strategies to prevent late payments. These terms should outline the payment schedule, acceptable payment methods, and any late payment fees or interest that will apply if the invoice is not paid on time. By setting these expectations early, both parties understand the consequences of late payments, which can deter delays and foster a more reliable payment culture. Regularly reviewing these terms with your customers can also help adapt to any changes in their financial situation, ensuring a smooth and continuous business relationship.

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

  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 export and import.

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 is begun. 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.

How to deal with late payments
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 expense by bad debt recovery.
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