Connor Campbell
George Harrison
Hannah Nemeth
If you’re a small business owner, then you’ll know that 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.
So it’s no surprise that the late payment of invoices is a problem which keeps many small business owners up at night.
When your customers don’t pay you on time, cash flow can very quickly come under pressure. And when you are faced with a string of late payments, these problems only become more intense – and more worrying.
Last year, a survey of business owners conducted by PayIt, NatWest’s open banking solutions provider, revealed the scale of the UK’s late payment problem, with over a quarter (27%) of small- and medium-sized businesses (SMBs) admitting they were owed £5,000 – £20,000 in unpaid invoices.
Perhaps even more alarming was the revelation that a majority (55%) of UK SMBs said that late payments had increased over the course of the previous year – suggesting the late payment scourge is only getting worse.
Below, we take a look at the impact that late payment of invoices can have on small businesses, and we lay out your rights when chasing those troublesome late payments.
How late payment of invoices hurts 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.
When invoices are paid late, or where late payment has a serious impact on cash flow, small businesses may struggle to pay their own suppliers and their bills.
And where small businesses face uncertainty over late payments, they may be forced to conserve capital by pausing (or abandoning) plans to invest and grow or risk going into debt.
Ultimately, where businesses are taking out loans on unfavourable terms or with high interest rates to cover the shortfall created by late payments, serial late payment problems can present an existential risk for small businesses.
What can small businesses do about late payments?
Everywhere you look, there are indications that the late payment problem is getting worse.
Research by Good Business Pays, which campaigns on behalf of suppliers, found that since August 2023, there was a 20% increase in companies reporting average payment times over 80 days.
But, if your business is suffering because of late payments, rest assured that you aren’t powerless in this situation.
From charging statutory interest to claiming debt recovery costs, there are steps you can take to protect your business from the impact of late payments.
What counts as a late payment?
According to government legislation, a payment is classed as ‘late’ if:
- you have agreed a payment date (usually within 60 days for business transactions and within 30 days for dealings with public authorities) and the payment has not been made
- 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 statutory interest can I charge on a late payment?
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 5.25%, that means you can charge statutory interest of 13.25%.
To calculate the interest, you would multiply £2,000 by 0.1325, which equals £265.
Divide £265 by 365 (i.e. the number of days in a year), and you get roughly 72p.
This means you could charge 72p a day for every day the invoice remains unpaid. You need to send out a new invoice if you decide to charge interest.
How do I claim debt recovery costs after a late payment?
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 to protect against late payment?
While charging statutory interest may be the prompt your client needs to pay up and settle their late payment, 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.
How can invoice finance help with late payments?
Trade credit insurance isn’t your only option to guard against the late payment of invoices – you could also consider invoice finance. This is where you use your unpaid invoice as 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?
Image source: Getty Images
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