Connor Campbell
Managing cash flow is one of the most important parts of running a business, from tracking the money that comes in to paying for outgoings such as salaries and energy bills. Yet that can be made incredibly difficult when you are faced with a string of late payments.
The problem is so prevalent that just over half (55%) of small and medium-sized enterprises (SMEs) in the UK have outstanding invoices from the 2022/23 tax year. That’s according to NerdWallet’s exclusive survey of 1,000 small business owners and decision-makers, including sole traders.
With the cost of living crisis and the UK energy crisis creating a squeeze on businesses across the board, the issue of late payments appears to be getting worse. Almost half (46%) of respondents said that the number of outstanding invoices they were left with at the end of the 2022/23 tax year had increased when compared to the previous year.
Roughly a third (35%) of unpaid invoices were less than a month overdue. However, just over a quarter (27%) were between one and three months late, and a fifth (20%) were four to six months late. Any late payments are problematic, but it’s this kind of longer-term lateness that can especially play havoc with a business’s cash flow.
Below, we take a look at the impact late payments have on small businesses and your rights when chasing unpaid invoices.
The impact of late payments on small businesses
Late payments can have serious financial implications, especially for smaller businesses, sole traders and freelancers who don’t have savings to fall back on.
For example, 39% of owners and decision-makers NerdWallet spoke to had, or thought they might have to, reduce their overheads due to unpaid invoices. This included everything from downsizing their offices or working remotely to cancelling a team’s social spend.
Meanwhile, 28% of respondents paused recruitment and a fifth froze planned pay rises. A quarter even had to source financial support, such as a business loan, to keep running.
What’s more, 22% of respondents had, or might have to, make redundancies to cope with the financial shortfall created by their unpaid invoices.
What to do if a payment is late
According to NerdWallet’s survey, the most common amount of time business owners waited before taking action was one week. After that, the arduous task of chasing a late payment begins.
Half of business owners and senior decision-makers NerdWallet polled said that they send reminders every week until an invoice is paid, while a quarter admitted to chasing late payers every day. And if they don’t hear back, 40% said they follow up on non-payments with a letter or phone call.
At the more extreme end of the spectrum, 14% of businesses had to resort to using a debt collection agency, with 8% forced to write off the unpaid invoice entirely.
Surprisingly, more than a fifth (22%) of respondents were willing to wait for the client to make the late payment without chasing.
Late commercial payments and statutory interest
Interestingly, less than a quarter (23%) of respondents said they charge interest on top of the previously agreed amount with every reminder sent. And only one in 10 (11%) claimed debt recovery costs.
This suggests that the majority of businesses and freelancers may not be aware of legislation surrounding late payments, or do not feel comfortable charging statutory interest.
When is a payment late?
According to government legislation, a payment is classed as ‘late’ if:
- you have agreed a payment date, and the payment has not been made within 60 days of that date for business transactions, and 30 days for public authorities
- you have not agreed a payment date, and the payment has not been made within 30 days of receiving the invoice, or you delivering the goods or services, whichever is later
How much interest can I charge?
If a payment is late, you are entitled to charge statutory interest on the unpaid invoice. Statutory interest is 8% plus the Bank of England base rate for business-to-business transactions.
Let’s say you have an unpaid invoice worth £2,000. If the Bank of England base rate is 4.25%, that means you can charge statutory interest of 12.25%.
To calculate the interest, you would multiply £2,000 by 0.1225, which equals £245.
Divide £245 by 365 (i.e. the number of days in a year), and you get roughly 67p.
This means you could charge 67p a day for every day the invoice remains unpaid. You need to send out a new invoice if you decide to charge interest.
Claiming debt recovery costs
On top of statutory interest, you can also claim debt recovery costs on late payments. How much you can charge is tied to the size of the unpaid invoice:
| Size of unpaid invoice | What you can charge |
| Up to £999.999 | £40 |
| £1,000 to £9,999.99 | £70 |
| £10,000 or more | £100 |
You can only charge a fixed sum once per late payment when claiming debt recovery costs.
» MORE: What is freelancing?
Should I take out trade credit insurance?
While charging statutory interest may be the prompt your client needs to pay up, it doesn’t provide financial assistance for the period when you are without the cash you have earned. That is where trade credit insurance can come in.
Trade credit insurance is a form of cover designed to protect against customers not paying, or paying later than the agreed date. If your business has trade credit insurance, the insurer can step in and pay a proportion of your ‘trade debt’ once a pre-agreed waiting period following the initial invoice due date has elapsed.
At present, however, the product may not be suitable for businesses of all sizes, particularly smaller firms. In response to this, the Federation of Small Businesses (FSB) has recommended that insurers develop more flexible trade credit insurance options, such as covering lower invoice amounts.
What about invoice finance?
Trade credit insurance isn’t your only option – you could also consider invoice finance. This is where you use your unpaid invoice as a security for a loan.
You should make sure that you completely understand the implications of invoice financing, and what the lender will and will not do, before borrowing.
» MORE: What is invoice financing?
About the research
The survey was conducted by OnePoll on behalf of NerdWallet, polling 1,000 UK business owners and senior decision-makers at SMEs, including sole traders. The survey was conducted between 14 and 18 April 2023.
OnePoll is an MRS Partners Company and its employees agree to adhere to the MRS Code of Conduct and MRS Company Partners Quality Commitment while undertaking research.
Image source: Getty Images
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