Last editedAug 20206 min read
What do you do when a debtor fails to pay their invoice on time?
Overdue invoices are invoices which have not been paid in full by the time the agreed payment terms have elapsed. For example, if an invoice is issued with 30 day payment terms and the total amount hasn't been paid after the 30th day, the invoice is considered to be 'overdue', 'unpaid', or 'late'.
Prevalence of late payment
Businesses live in dread of late payment and with good reason. Two-thirds of invoices in the UK are paid late, according to research by MarketInvoice, with SMEs particularly vulnerable. They’re also the most likely to be damaged by unpaid bills, with cash flow and productivity suffering. Some even go under due to unpaid invoices. And there’s evidence that late payments are on the increase, with some industries being notably worse than others.
Businesses operating in the transport sector are the worst offenders, being an average of 25 days late paying, MarketInvoice data shows.
The utilities industry takes an average of 23 days extra to settle its bills.
Media firms are an average of 21 days overdue paying invoices, while management consultants take 20 days more than requested to pay up.
Tech companies are an average of 19 days late, compared with the 18 days extra both financial services and energy businesses take to pay their debts.
Construction businesses are an average of 17 days late paying invoices.
Supermarket and retail firms are 14 days late paying on average, while wholesalers and food and beverage businesses pay up 13 days late on average.
Escalating action against late payers
Given late payment is evidently so ubiquitous, what can companies do to encourage sluggish payers to hand over the money? There are a number of actions that can be taken, in order of severity:
Email chasing - Sending a friendly reminder to jog the accounts department into action.
Phone calls - A call to the accounts payable team, when emails are replied to slowly or missed.
Formal letters - To escalate a polite request for payment into something more serious.
Sending debt collectors - Engaging a third-party to collect the debt on your behalf.
Charging late payment penalty fees or interest - Leveraging applicable laws to charge additional fees to late-paying customers.
Legal proceedings - Taking your customer to court to enforce payment.
It’s understandable that many businesses are reluctant to take some of these actions for fear of antagonising a customer. Just one in five smaller firms has tried to apply late payment interest on an unpaid invoice, Zurich Insurance research shows. But given the real threat of losing your business if invoices go unpaid, action is sensible.
When you're dealing with a late payer, email is your best first approach. Include your company's name and the invoice number in the subject line of every email you send, and cover off the amount owed and the due date in the body. Always attach a copy invoice to the email, so they don't need to go hunting for any further info (which will only serve to continue delaying payment). Be polite but direct - the outcome you want is your late-paying customer to agree a date on which they will pay. If you want to prevent late payment in future, send these emails in the period between issuing your invoice and the date which payment is due. A timely reminder can make all the difference in your invoice being forgotten or deprioritised, versus being paid on time.
If your emails aren't getting a reasonable response - or any response at all - your next port of call is a phone call. You'll need to get in touch with the accounts payable team, however they can be deliberately difficult to reach. A good backup option is getting in touch with your main point of contact in your customer's business. Have ready the invoice reference number, a description of the goods or services provided, the invoice issue date and due date, who it was issued to, and details of any communications about this invoice so far. The goal of a phone call should be to have them agree a date which they'll pay the invoice. If the appropriate party to authorise this isn't reachable, instead seek agreement that the message will be passed onto them and that they will reach back out to you to provide a payment date.
If you're still not getting a promised payment date, or your late-paying customer repeatedly fails to meet their promised payment date, sending them a formal letter is your last option before undertaking much more severe action. A formal letter will follow much the same format as a chasing email, however the language used is likely to be far less casual and will leave no room for doubt as to what you've done to remind your customer to pay, and how they've failed to follow through. If you are prepared to send debt collectors, charge late payment interest, begin legal proceedings, or cease doing further business with this customer should they fail to pay you, make it clear in this letter, and give them one final deadline to pay you by. You should send this letter both via paper in the post, and via email.
Before engaging debt collectors, it's worth shopping around. Different providers are likely to have different fee structures, and some may operate more aggressively than others. Always ensure you pick a licensed debt collection agency that matches the ethos and standards of your own business, otherwise your reputation could be harmed by association.
Late payment interest
Interest on late payments in the commercial sector is able to be charged, by law, in many countries around the world. Some legal frameworks also allow lump sum penalty charges to be made as well, to help recover the cost of collecting the payment. What's allowed to be charged, however, may be lower than you expect. In the UK, for example, "the interest you can charge if another business is late paying for goods or a service is... 8% plus the Bank of England base rate for business to business transactions." (gov.uk) And the maximum debt recovery cost is only £100. It's well worth weighing up the value of the invoice and the cost to your own time against the amount gained with late payment interest and debt recovery penalties included, to ensure it's the right move for your business.
Late Payment of Commercial Debts Act
In the UK, the Late Payment of Commercial Debts Act states that a company can charge statutory interest of 8% plus the Bank of England base rate for business-to-business transactions. However, if a contract already outlines a different agreed rate of interest, this calculation will not apply. To charge interest under the Act, it’s necessary for the business to issue a new invoice stating the new sum owed, including the interest sum.
When you can implement late payment interest
In the UK, you can claim interest on late commercial payments depending on the agreed payment date between you and your customer. If you:
Agreed a payment date - This date must be within 30 days of delivery of goods/services when dealing with public authorities, and 60 days for business transactions. (Periods later than 60 days can be agreed upon, but it must be fair to both parties.)
Did not agree a payment date - The law stipulates that late payment occurs 30 days after the invoice is delivered or the goods/services are delivered (if this occurs later).
Once the period of 30 days or 60 days (or longer, if agreed) has elapsed, the payment is considered late and late payment interest can be charged.
How to calculate late payment interest
Late payment interest is 'statutory interest' and is calculated as so:
Late payment interest rate = 8% + Bank of England base rate for business to business transactions
Annual late payment interest charge = (cost of goods/services) x (late payment interest rate)
Daily late payment interest charge = (annual late payment interest charge) / 365
Actual late payment interest charge = (daily late payment interest charge) x (number of days payment is late)
You may provide in your terms of sale a different manner of calculating late payment interest, as long as your customer agrees to it. This rate of late payment interest will be the one that applies if you choose to charge it. If your customer is a public authority, you cannot offer a lower rate of late payment interest than the above.
How to charge late payment interest
To charge your customer late payment interest, you will need to invoice them for the new cost. You should clearly identify this as a late payment interest charge, noting that you are within your rights to charge it (it's worth directing your customer to this gov.uk page), and a brief explainer of how you arrived at the cost you're charging. Your customer may fight back against this new cost, so you should reference key correspondence you've had with them about payment of the original invoice - including dates and summaries of what was agreed - so that they are unable to reasonably justify their late payment.
This is undoubtedly the most severe action you can take against a late-paying customer. While sending debt collectors or charging late payment interest may shake your customer's interest in continuing to do business with you, taking them to court is almost certain to end your relationship. Deciding to take this action shouldn't be thought of lightly - the cost of legal fees and the time it consumes from you could outweigh the potential return from winning the case.
For small businesses or sole traders in the UK, the government has a Money Claim Online service if you're owed less than £100,000. This involves filling out a small claims court form online, which will prompt a court letter to the customer demanding prompt payment and threatening a County Court Judgement for failure to settle the invoice.
Ways to avoid late payment
Of course, prevention is better than cure and taking measures to avoid being paid late is essential to good business:
Run credit checks on new customers of any size or, at the very least, ask around about their reputation. And always trust your gut. If you don’t have a good feeling about a customer, don’t deal with them.
Make sure your payment terms are clear and easy to read on the invoice. Include details of late payment interest charges, too.
Send out the payment demand as soon as the work is finished. A follow-up call or email to check the invoice has been received and is in order doesn’t go amiss either. In fact, maintaining a friendly relationship with whoever handles payments at the other end is always worthwhile to smooth out problems when and if they arise.
Consider whether it’s possible to ask for all or some of the money owed up front.
Set up payment reminders and alerts so that you’re immediately aware if a debt has gone over its due date.
Think about automating payments where possible to avoid the hassle of chasing invoices altogether. Payment providers such as GoCardless can do all the hard work for you, taking regular payments or one-off amounts quickly and at minimal cost.