Late Payments: What To Do

Late payments can hurt your cash flow, disrupt operations, and create unnecessary stress. Whether you’re a freelancer, small business, or large company, knowing how to handle overdue invoices is key to maintaining financial stability.

Clearly defining payment terms is essential for smooth financial operations. Set clear expectations for when clients must pay you and when you must pay suppliers. Establish these terms upfront and follow a structured invoicing process to ensure consistency and avoid deviations. Businesses often extend credit without receiving anything in return. Treat them as a negotiation tool from the outset to build a strong, balanced payment relationship.

Here’s what you need to think about:

1. Set Clear Payment Terms

Prevention is the best cure! Include clear payment deadlines, late fees, and penalties in your contracts to ensure clients understand their obligations.

2. Send Friendly Reminders

A polite email or call before the due date can prompt timely payment. If the invoice is overdue, follow up immediately with a firm but professional reminder, ideally providing a copy invoice or statement of account to save further delays.

3. Charge Late Fees

If your contract allows, enforce late fees to encourage on-time payments. Even a small penalty can motivate clients to settle their debts faster.

4. Offer Payment Plans

If a client is struggling financially, consider negotiating a structured repayment plan rather than letting the invoice remain unpaid.

5. Escalate When Necessary

If reminders go unanswered, send a formal letter. As a last resort, you may need to take legal action. You will need an audit trail of communications to confirm you have made every attempt to resolve directly.

6. Protect Yourself in the Future

Run credit checks on new clients, require deposits for large projects, and consider invoice factoring to improve cash flow.

Being proactive and having a clear plan for late payments will help you maintain a steady cash flow and avoid financial headaches. Don’t let unpaid invoices disrupt your business and consume your time for services already completed!

Key Points to Consider:

1. Contractual Late Payment Terms – If your contract includes specific late payment interest rates or fees, these will take precedence over statutory rates. However, they must be clearly stated and fair to be enforceable.
2. Statutory Late Payment Rules – Under the Late Payment of Commercial Debts (Interest) Act 1998, if no contract terms exist, creditors can charge:
   • 8% above the Bank of England base rate
   • Fixed compensation (£40, £70, or £100 depending on the debt amount)
3. Unfair Terms – If your contractual late payment fee is unreasonably low or high, a court may rule it unenforceable and apply statutory late payment rules instead.

Best Practice:

• Ensure late payment terms are clearly stated in your contract.
• Make fees reasonable and proportionate to avoid disputes.
• Consider including an escalation clause (e.g., increasing penalties for extended non-payment).

Having a well-defined contract protects your business and ensures you get paid on time!

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