Your Guide to Late Payment Rules in the UK - What Small Businesses Can Enforce and Alternative Solutions

Guest blog by Paul Jones, Head of Commercial Operations at BusinessComparison

If there’s one phrase that keeps small business owners awake at night, it’s ‘cash flow’.

In my 20 years working across the financial services and B2B sectors in the UK, I’ve seen brilliant businesses stall, not because they lacked customers, innovation, or profit, but because the cash simply wasn’t there when it was needed. The ‘profit’ was sitting on an unpaid invoice, even though bills were due.

The reality of the UK’s payment culture can be unforgiving. We often see a ‘David and Goliath’ dynamic in which large corporations retain cash to bolster their balance sheets, leaving SMEs to act as unofficial lenders, bridging the gap between delivery and payment.

But here’s the thing: you’re not powerless. The UK has robust late payment rules designed to protect your company. The challenge isn't usually the law, but the awkwardness of enforcing it without damaging a client relationship. There’s often a fear that demanding payment makes you look desperate. In my experience, it actually makes you look more professional, organised, and credible.

In this guide, we’ll skip the ‘legalese’. I want to give you a practical toolkit, including the calculations, copy-and-paste email clauses, and preventive steps, to help you get paid. And for when the rules aren't enough, we’ll look at how invoice finance can bridge that critical gap.

The Legal Stance

Many business owners are vaguely aware they can charge interest, but few know the specifics. The law is firmly on your side under the Late Payment of Commercial Debts (Interest) Act 1998.

It’s important to note that these rights apply even if they aren't written in your contract. Unless you’ve agreed to alternative terms that provide a ‘substantial remedy’ for late payment, the statutory rules apply by default.

If a business customer is late paying you, you have a statutory right to claim three distinct things:

1. Statutory Interest

You’re entitled to charge interest at 8% plus the Bank of England base rate for B2B transactions.

The Calculation:

• Base Rate: Check the Bank of England base rate at the start of the six months when the debt became overdue. Let’s say it’s 5%.
• Your Rate: 8% (Statutory) + 5% (Base) = 13%.
• The Formula: (Debt Amount x Interest Rate) / 365 days = daily interest.

Example:

You’re owed £5,000.

Annual interest = £5,000 x 13% = £650.

Daily interest = £650 / 365 = £1.78 per day.

If payment is 30 days late, you will incur £53.40 in interest on the bill.

2. Fixed Compensation

In addition to interest, you can demand a fixed sum for the inconvenience of pursuing the debt. You don’t need to prove you spent this money; it’s a statutory entitlement per invoice.

3. Reasonable recovery costs

This is the part many small businesses miss. If your actual costs for recovering the debt (e.g. hiring a debt collection agency or legal fees) exceed the fixed compensation above, you can claim the difference as ‘reasonable costs’.

Getting the Basics Right

Before we look at chasing payments, we need to understand why they’re delayed. In my experience, a significant portion of late payments is not malicious, but bureaucratic.

Big finance teams process thousands of invoices. If yours is missing a PO number or is addressed to the wrong entity, it doesn't get rejected; it quietly sits in a ‘query’ pile until someone gets around to looking at it.

Your Checklist:

1. The Purchase Order (PO): Never start work without one if your client uses them. Quote the PO number on the invoice subject line.
2. The Payment Terms: Don't leave this blank. If you don't specify a date, the law defaults to 30 days.
3. The Bank Details: It sounds obvious, but ensure your sort code and account number are bold and clearly visible.
4. The Nudge: Send a polite reminder a few days before the invoice is due.

Pragmatic Enforcement

Knowing the rules is one thing; sending the email is another. You don’t want to burn bridges with a client who may just be disorganised. In my experience, the best approach is an ‘escalation ladder’. Start casual, then get formal. Here are clauses you can copy straight into your invoices or emails.

1. The Gentle Reminder (1-2 days after due date)

This assumes a mistake and mentions the rules without threatening to use them.

"Just a quick nudge that Invoice #123 was due for payment yesterday. I know how easily these things can slip through the cracks.

Please could you confirm this is being processed? As a small business, we rely on timely payments to manage our cash flow, so your help in settling this quickly is much appreciated."

2. The Formal Notice (14+ days late)

Now you introduce the legislation. You’re not charging it yet, but you’re reminding them you can do so. This signals that you know your rights.

"We note that Invoice #123 is now 14 days overdue.

We value our relationship and would prefer to avoid adding late payment charges. However, please be aware that under the Late Payment of Commercial Debts (Interest) Act 1998, we are entitled to charge statutory interest at [Current Rate]% plus fixed compensation on this overdue amount.

Please settle the balance of £[Amount] by [Date] to avoid these automatic statutory charges being applied to your account."

3. The Enforcement (30+ days late)

If they’re ignoring you, the relationship is already strained. Now, strictly enforce your rights.

"Despite our previous reminders, Invoice #123 remains unpaid.

We have now reissued the invoice to include statutory charges as permitted by UK law:

• Principal Debt: £5,000
• Statutory Interest (30 days @ £1.78/day): £53.40
• Fixed Compensation: £70.00
• Total Now Due: £5,123.40

Payment is required immediately. If payment is not received within 7 days, we reserve the right to escalate this to further recovery action."

The Broader Landscape

It’s worth noting that if you supply big companies, two key mechanisms are working in your favour. Knowing about these gives you leverage in negotiations.

1. Payment Practices Reporting

Large UK companies (generally those with a turnover over £36m) are legally required to report on their payment practices twice a year. They must publicly disclose the average time they take to pay suppliers and the percentage of invoices paid late.

Before taking on a large contract, check their payment record on the Government database. If they average 85 days to pay, you need to price that delay into your quote - or arrange invoice finance beforehand.

2. The Fair Payment Code

You may be familiar with the Prompt Payment Code. As of 2024, this has evolved into the Fair Payment Code. Signatories (often large businesses) commit to paying 95% of invoices within 30 days (gold status) or 60 days (silver/bronze).

If a signatory pays you late, you can complain to the Small Business Commissioner. The threat of losing their status can be a powerful motivator for their finance department to prioritise your invoice.

The Alternative Solution

Even with the best enforcement clauses in the world, some clients will simply dictate terms. Or you could land a massive contract that requires you to buy stock now, even if you won't get paid for three months. This creates a cash flow gap, limiting your small business’s growth.

This is where invoice finance can be used as a strategic tool. It converts your outstanding balance into available cash immediately.

Understanding Your Options

A common misconception is that all invoice finance is the same. In reality, there are two main types, and choosing the right one depends on how much control you want over your customer relationships.

1. Invoice factoring

This is the most common option for smaller businesses. You sell your unpaid invoices to the lender, who immediately advances up to 90% of their value. With this option, the lender assumes control of your credit.

They chase the customer for payment, saving you time, which is excellent if you don't have a finance team. However, the drawback is that your customers will know you’re using a finance facility (though this is standard practice nowadays).

2. Invoice discounting

Slightly larger businesses often prefer this with their own credit control processes. You still get the cash advance (up to 90%), but you keep control of the sales ledger. The key difference is that you continue to chase the payment yourself, and your customer pays into a trust account that appears to belong to you.

Invoice discounting is entirely confidential, and your customers never know you are borrowing against their invoices. However, you will still have to do the legwork.

Why Consider Invoice Finance?

• Certainty: You know precisely when your cash will arrive.
• Growth: You can take on larger contracts by funding the upfront costs.
• Protection: Some facilities include protections that mean if your customer goes bust, you don't have to repay the lender.

Comparing Invoice Finance Providers

Choosing the right invoice finance partner can significantly improve your cash flow and growth potential. There are many factors to consider, from advance rates and fees to the level of service and flexibility offered.

For businesses exploring the broader market, comparison platforms such as BusinessComparison provide an overview of available options across different lenders. Reviewing these alongside direct providers like Novuna can help you identify the most suitable solution for your circumstances.