Key takeaways
- Late payment costs the UK economy around £11 billion a year and contributes to 14,000 business closures a year, according to government research.
- A profitable business can still run out of cash. Growth makes it worse, because you pay your team before clients pay you.
- You have legal rights: statutory interest and fixed recovery costs on late B2B invoices.
- The biggest wins are in your own process: terms, deposits, invoicing speed and a consistent chasing routine.
- The government intends to cap business-to-business payment terms at 60 days.
How big is the late payment problem in the UK?
Service businesses are particularly exposed. Their main cost, people, is paid monthly whatever happens, while income depends on clients paying invoices on time.
Why do profitable service businesses run out of cash?
Profit and cash are not the same thing. Profit is what you've earned. Cash is what you've actually collected.
Picture a business that delivers £100,000 of work a month on 30-day terms, with clients who actually pay in 45 days. At any moment it has around £150,000 tied up in unpaid invoices, while salaries, rent and VAT go out on schedule. If it grows by 20%, that gap grows too. Growth funded by late-paying clients is growth funded by your overdraft.
That's why cash is often the hidden constraint in a fast-growing service business. The fix isn't more sales; it's a shorter gap between doing the work and being paid for it.
What are your legal rights when a client pays late?
Under the Late Payment of Commercial Debts (Interest) Act 1998, for business-to-business transactions:
- When it's late: if no payment date was agreed, an invoice is late 30 days after the client receives it, or after you deliver the service if that is later. Agreed terms should usually be within 60 days, and longer terms must be fair to both businesses.
- Statutory interest: you can charge 8% plus the Bank of England base rate, unless your contract sets a different rate.
- Fixed recovery costs: you can claim £40 for debts under £1,000, £70 for debts of £1,000 to £9,999.99, and £100 for debts of £10,000 or more, on top of the debt and interest.
- Help with larger clients: the Office of the Small Business Commissioner can help small businesses with payment disputes involving larger businesses.
You may never need to use these rights, but mentioning them in your terms and in a formal reminder changes how seriously an invoice is treated.
Which payment terms protect a service business?
Seven terms worth putting in every agreement
- Short terms: 14 days, or payment on receipt for smaller clients.
- Deposits: 25% to 50% upfront on projects before work is scheduled.
- Milestone billing: invoice at agreed stages rather than at the end.
- Retainers billed in advance: monthly, at the start of the month.
- Direct debit or card on file for recurring work, so payment isn't a decision each month.
- A named accounts contact and PO process agreed at the start, so invoices don't sit in the wrong inbox.
- A late payment clause referencing statutory interest and the right to pause work on overdue accounts.
What does a good chasing routine look like?
Most late payment is disorganisation, not bad faith. A consistent, polite routine fixes most of it.
| When | What you do |
|---|---|
| Day work is delivered | Send the invoice the same day, with the PO, due date and payment details clearly shown. |
| 3 days before due | A friendly reminder: "Just a heads-up that invoice 1042 is due on Friday." |
| Due date | A short note confirming it's due today, with a payment link. |
| 7 days overdue | A phone call to your named contact. Ask what's needed to release payment. |
| 14 to 30 days overdue | A formal letter stating the amount, statutory interest and recovery costs now due. |
| 30+ days overdue | Pause further work in line with your terms, then consider mediation or a claim. |
Make it someone's job. In many service businesses chasing falls to the founder, who is also the person with the client relationship, and so it doesn't happen.
What should you measure?
- Days to invoice: how long between finishing work and sending the invoice. Aim for zero.
- Debtor days: on average, how long clients take to pay. Track it monthly and by client.
- Overdue balance: total owed past due, split into 0 to 30, 31 to 60 and 60+ days.
- Cash runway: how many months you could cover costs from cash in the bank.
Review these in the same weekly meeting as your sales numbers. Cash is as much a growth measure as revenue.
It's one of the most common constraints we see. We'll help you find where the cash is getting stuck and fix it.
This article is general information, not legal or financial advice. For a specific dispute, take professional advice.
Frequently asked questions
Can I charge interest on late payments in the UK?
Yes. Under the Late Payment of Commercial Debts (Interest) Act 1998, a business can claim statutory interest of 8% plus the Bank of England base rate on late business-to-business payments, unless your contract sets a different rate. You can also claim a fixed sum for debt recovery costs of £40, £70 or £100 depending on the size of the debt.
When is an invoice legally late in the UK?
If you haven't agreed a payment date, a business-to-business payment is late 30 days after the customer receives the invoice, or after you deliver the service if that is later. If you agreed terms, it is late after the agreed date. Agreed terms should usually be within 60 days for business transactions, and longer terms must be fair to both businesses.
What payment terms should a service business use?
Many service businesses use 14 days, or payment on receipt for smaller clients, combined with deposits, milestone billing or monthly retainers billed in advance. The shorter and more predictable the cash cycle, the less working capital the business needs to grow.
What is the UK government doing about late payment?
In its 2026 response to the late payment consultation, the government said it intends to introduce a maximum payment term of 60 days for business-to-business payments and to strengthen reporting and enforcement, including the role of the Small Business Commissioner. Its research estimates late payment costs the economy £11 billion a year and leads to 14,000 business closures a year.
How do I chase a late invoice without damaging the relationship?
Agree terms clearly before work starts, send invoices the day work is delivered, send a friendly reminder before the due date, then follow a fixed, polite escalation: a reminder on the day it falls due, a call after seven days, and a formal letter referencing statutory interest after 14 to 30 days. Consistency, not confrontation, protects the relationship.
Sources and further reading
- GOV.UK, 'Late payment consultation: time to pay up' (government response, 2026)
- GOV.UK, 'Late commercial payments: charging interest and debt recovery'
- GOV.UK, 'Claim debt recovery costs on late payments'
- Office of the Small Business Commissioner
Last reviewed 19 October 2026
