How to avoid late payments: 9 best practices

Blogs 14 Feb 2020

One major cause of headaches, for both businesses and individuals, is when customers, clients, or others refuse to pay money they owe.


This content was last reviewed May 2020

One major cause of headaches, for both businesses and individuals, is when customers, clients, or others refuse to pay money they owe. Despite letters and phone calls they may fail to meet their financial obligations and can leave their creditors feeling frustrated and out of pocket. For many small businesses, this can make the difference between their business surviving or going under.

The debt recovery process can seem daunting, but we’re here to help you with some best practices for your small business to avoid late payments.

Check the business name and legal status

Knowing who you are dealing with can provide confidence and comfort in your business dealings. If you don’t know exactly who you’re trading with, it can be difficult to establish whether credit should be offered. It may also create problems later down the line, if you need to commence any legal proceedings.

It’s important for you to know the exact name and trading style of the business. The company may trade under a different name from the people or company who own the business. You can check the government website to get further information and documents about limited companies.

If the entity you’re dealing with is a sole trader or partnership, the proprietor or partners are personally liable, so make sure you have their full details correctly noted down.

Ask for information

Don’t be afraid to ask for all the information you need. If you can’t get it now, it will certainly be harder further down the line. If it’s not a limited company, you should check the details of the owners or partners, like names and addresses - it may be essential if things don’t go to plan down the line.

You’ll be able to find and verify this information with any company documentation they have provided you with.

Invest in credit reference information

It’s also possible to use a credit reference agency to check details and credit status. You should also ask whether the information obtained supports the amount of credit requested. Another check is to take references from other suppliers of the businesses – and ask yourself too, if they were previously dealing with your competitor, are you happy about their reasons for coming to you?

Agree payment terms

Set out the agreed payment terms in writing, in advance. This way, you know what to expect, rather than wondering why money hasn’t arrived.

When it comes to payment terms, it’s essential to discuss and agree these with customers before accepting an order. If payment fails to arrive for goods or services which you have provided, your cash flow may be under undue pressure.

Cash flow keeps businesses in business and – if you think you are being paid on one date and your customer has a different date in mind – problems could arise, especially if you’re banking on that money for other transactions. Agreeing payment terms, formally, in advance is vital for healthy cash flow.  

Get the details right

Whenever you write about payment terms, and on your invoices, include the words:

“We will exercise our statutory right to claim interest (at 8% over the Bank of England base rate) and compensation for debt recovery costs under the Late Payment legislation if we are not paid according to our agreed credit terms.’’

Even if you don’t exercise that right, it can be a useful deterrent against late payments. Small businesses should also make sure the payment due date is clearly shown on all invoices, and have a process in place for dealing with requests from customers who ask for a longer period to pay the invoice.  

Your invoice wording should also stipulate your right to make interest charges on late payments. You can always decide not to charge these if you don’t want to, and make a virtue of that with your customer.

Set yourself rules

Set some rules that your business will always follow – and don’t be tempted to go against the rules you set, even if you’re put under pressure to supply goods or services urgently.

It’s always worth confirming the agreed payment terms in writing before you accept an order, and having standard payment terms in place. You should have a policy within your organisation that these payment terms can’t be changed unless properly authorised. Make sure everyone who agrees to the terms is aware of the policy and follows it. Don’t forget to review this policy annually.

Make contact

If your debt becomes overdue, make a call to the person who’s due to pay with a polite query. Most likely it’s just been overlooked, but if there’s any problem, this will give an opportunity for it to be resolved at an early stage.

Send a letter before action

If the debt still isn’t paid, send out a letter before action. This is a formal letter that requests payment within a set time period, warning of a court claim if the money isn’t paid.

In most cases, a letter before action can help to clear up a dispute without the need for the case to be taken to court, which most debtors will want to avoid.

Raise a complaint

You can also contact the Small Business Commissioner, appointed by the Government to tackle poor payment practices and late payments in the private sector.  The SBC offers general advice and information to small businesses, and considers complaints from small businesses with fewer than 50 employees who are encountering issues with larger business customers.

FSB Debt Recovery

Our FSB Debt Recovery service will assist you in recovering the money owed to your business. through a bespoke range of guidance, template documents and letters, as well as 24/7 legal advice from qualified and experienced lawyers.

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