Small Business Guide to Handling Late Payments in the UK

Cash flow is the lifeblood of any small business. Yet late payments are all too common, with 60% of small business owners in the UK admitting that late payments stop their businesses from growing¹.

If you’re tired of delivering the product but seeing your payments drip in, we’ve put this guide together to help small business owners like you handle late payments effectively.

We’ve also touched on how to collect payments easily from both domestic and foreign customers using Wise Business, thanks to features like the ability to hold and manage currencies with an Advanced plan*.

Let’s dive in.

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**Disclaimer: The UK Wise Business pricing structure is changing with effect from 26/11/2025 date. Receiving money, direct debits and getting paid features are not available with the Essential Plan which you can open for free. Pay a one-time set up fee of £50 to unlock Advanced features including account details to receive payments in 22+ currencies or 8+ currencies for non-swift payments. You’ll also get access to our invoice generating tool, payment links, QuickPay QR codes and the ability to set up direct debits all within one account. Please check our website for the latest pricing information.

Key takeaways

Topic	Tips and notes
🌐 Foreign Transactions	Utilise the Wise Business Advanced plan to easily hold, manage, and receive payments in multiple foreign currencies from international clients.
✅ Prevention & Automation	Automate your invoicing and payment reminders and offer various payment methods to help minimise administrative delays.
🔍 Credit Control	Conduct thorough credit checks on new or high-risk customers to either adjust payment terms or request an upfront deposit.
🎁 Encourage Promptness	Motivate early payment by offering incentives such as a small percentage discount or access to exclusive loyalty programmes.
📩 Gentle Pursuit	Send a friendly, professional reminder via multiple channels (email, text) immediately after the due date, in case of a simple oversight.
💷 Charge Late Interest	Legally, a business can charge statutory interest plus the Bank of England base rate on overdue business-to-business (B2B) payments in the UK.
🤝 Negotiated Payments	If a customer is in genuine financial difficulty, agree on a manageable payment plan to secure partial payment and avoid bad debt.
👨‍⚖️ Final Actions	As a last resort, issue a Letter Before Action (LBA) before escalating through the county court or utilising mediation/solicitor services.
📊 Improve Cash Flow	Implement a clearly defined collection strategy and consider accounts receivable factoring to sell outstanding invoices for immediate cash. Recommended reading: Recommended reading: improving cash flow

How to handle late payments without affecting your cash flow

• Have a clearly defined collection strategy
• Consider accounts receivable factoring
• Periodically assess your customers’ creditworthiness

Have a clearly defined collection strategy

Your AR team should have a roadmap for the steps to take when a customer is overdue on payments.

It should share when to follow up, how often, which channel to use, and the tone to use at each stage.

Start by going through your current collection processes. What is working and what isn't.

Document the best approach and share this strategy so it is accessible to your collections team members.

Consider accounts receivable factoring

Accounts receivable factoring lets you sell unpaid invoices in exchange for immediate cash. You sell your outstanding invoices to a factoring company for a slightly discounted fee.

The factoring company then collects payments directly from the customers, deducts its factoring fee, and pays the remaining balance to you.

One advantage of factoring is that you no longer worry about chasing payments. Accounts receivable factoring companies are responsible for chasing and collecting payments.

Periodically assess your customers’ creditworthiness

Check your customers' creditworthiness to understand how your customers are faring financially. It'll help you know customers who may pay late.

With this information, you can adjust the credit limits you allow for each client according to their creditworthiness.

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How to prevent late payments

• Automate invoicing
• Automate payment reminders and follow-ups
• Offer multiple payment options
• Conduct a thorough credit check
• Give early payers incentives
• Ask for upfront payment

Automate invoicing

When you're manually creating invoices for multiple customers, it's easy to make serious mistakes. Wrong customer details, inflated amounts, and wrong product descriptions - you name it.

The result? Endless disputes, back and forth, revision loops and an unavoidable cashflow crunch.

That’s not all. You lose precious time on repetitive tasks. It gets harder as your clients grow.

Automation can prevent these issues by letting you generate invoices faster and send them on time. Many of the best invoicing software in the market also let you track when a client opens and pays the invoice in real time.

This means you can speed up payments, improve your organisation's cash flow, and reduce your days sales outstanding (DSO) with minimal effort.

Automate payment reminders and follow-ups

Most accounts receivable software send automated reminders at scheduled intervals, nudging your clients to pay your invoices without you lifting a finger.

By consistently following up with customers, you build stronger relationships with their accounts payable (AP) teams and stay on their radar.

And the real win shows when your staff become free from manual tracking and follow-ups, and can focus on higher-value work.

Offer multiple payment options

Some customers prefer paying by card. Others prefer direct debit or bank transfer. When you provide your customers with several options, they can easily choose the one that works best for them.

It also reduces the likelihood of delayed invoice payments that fewer payment options cause.

Apart from receiving cheques, you can also accept payments through local bank transfers, wire transfers, and credit cards. Some accounts receivable software also lets you send an invoice with an embedded payment link.

If you work with customers abroad, a payment platform like Wise Business makes cross-border payments easy for your customers.

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Conduct a thorough credit check

Some customers have good credit payment habits, others don't. Check customers thoroughly before giving them credit or onboarding them.

You want to make all your customers happy - but not at the expense of your business’s survival.

Use credit checkers to assess your customers' creditworthiness, know their credit history, and identify those who normally pay on time. You'll figure out which client to offer credit, and when to adjust payment terms or ask for deposits from higher-risk customers.

Give early payers incentives

Reward customers for paying outstanding invoices on time. Give them discounts, loyalty programs, or other exclusive benefits. Happy customers will be encouraged to pay earlier than the due date.

Customers are more likely to pay early if they know there's something in it for them. Money savings, gifts and other benefits can change their behaviour.

For your small business, that means faster payments and fewer late or missed invoices to worry about.

It also creates a win-win: your customers get rewarded for paying early, and you spend less time chasing payments or dealing with overdue accounts.

There are many ways you can offer your customers incentives, but some popular ideas are:

• A small percentage discount, usually ranging from 1% to 5%.
• Tiered discounts offering higher discounts and gradually reducing them as the payment deadline approaches.
• Loyalty programs where customers earn loyalty points that give them access to special rewards.
• Access to exclusive benefits or services, e.g., extended support hours, access to priority services.

Ask for upfront payment

Asking for a deposit might feel a tad pushy, but it’s perfectly reasonable. You'll have some cash in hand to cover early project costs and it can work well if you have:

• New customers you haven’t built a relationship with yet
• Customers who have a history of paying late
• Larger or longer projects that need lots of time, materials, or resources upfront

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How to chase late payments (step-by-step)

• Send friendly reminders
• Charge late fees on late payments
• Consider setting up a payment plan
• Consider legal action

Send friendly reminders

Your customers could be swamped with work and forget to pay invoices. Send a quick reminder to let them know the invoice is due.

When sending reminders to your customers, use a friendly, professional tone. And reach out to them through different channels, like emails, texts, and calls, to increase your chances of getting paid.

A Chaser report shows that businesses using a combination of SMS invoice payment reminders and email payment reminders increase their chances of getting paid within a week of the invoice due date by 56%².

Charge late fees on late payments

Late fees give your payment deadlines real consequences and encourage customers to take them seriously.

Small businesses are allowed to charge 8% statutory interest on unpaid invoices, plus the Bank of England base rate for business-to-business transactions³.

But before you charge late fees, be upfront about it. Nobody likes surprise bills. Let them know from the onset that you will charge them late payment fees, so there are no “I didn't know moments” later.

Setting this expectation shows customers that you have a transparent, professional process in place.

Consider setting up a payment plan

If a customer is experiencing financial difficulties and genuinely can’t pay the full invoice right away, offer a payment plan. Instead of hoping for a full payment that might never land, break the amount into smaller, manageable instalments.

This way, you'll lower the risks of bad debts. You can both agree on collecting payments in instalments over time rather than waiting till eternity for the full amount.

An added perk is that being flexible with payments can strengthen customer relationships and improve your cash flow.

Consider legal action

If you’ve tried every reasonable option to get a customer to pay and nothing has worked, you might need to take legal action to recover the debt. Many SMEs avoid this option, and it's understandable, but sometimes, it's your last resort.

Start by sending a Letter Before Action (LBA) to your defaulting customers to formally let them know about the possible legal action you'll take if they don't pay by a specific deadline.

For most small business debts, you use the Small Claims Court to pursue these debts. This is a more straightforward and affordable legal route for small businesses. You can either file a claim online or by post⁴.

You can also choose mediation, where a professional helps you and your customer find a middle ground⁵. Compared to going to court, this is usually quicker, cheaper, and confidential.

Alternatively, you can also decide to work with a solicitor or a debt recovery service. The solicitor would send a Letter Before Action (LBA), negotiate a payment plan, and, if necessary, escalate to enforcement agencies on your behalf.

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Charging interest on overdue payments

As a small business in the UK, you can legally charge your customers interest on overdue payments under the Late Payment of Commercial Debts (Interest) Act 1998⁶.

This act allows businesses in the UK to charge interest on overdue invoices sent by one company to another for the supply of goods or services³.

Thirty days after you provided the services or delivered the goods (if this is later than the invoice date), or thirty days after the customer gets the invoice (whichever is later), the payment is classed as late or overdue⁷.

You can charge statutory interest, which is calculated as 8% plus the Bank of England base rate³.

You can also ask customers to compensate you with a fixed amount to cover the cost of chasing late payments. That said, remember to spell out these fees in the terms of your contract from the get-go.

Keep a clear view of your cash flow and payments due with Wise Business

Wise Business offers a range of fantastic features that make it the ideal business account for small business owners in the UK dealing with late payments.

With an Advanced plan, not only can you hold and manage money in 40+ currencies to easily track your funds, but you can also generate professional invoices with payment links to make it simpler for your clients to pay you on time.

You can even integrate your Wise Business account with major accounting software like Xero and QuickBooks to automate routine tasks and streamline your bookkeeping, saving you valuable hours on financial admin.

It’s time to simplify your small business financial recordkeeping and limit the impact of late payments on your cash flow.

Be Smart, Get Wise.

Register for Wise Business ✍️

**Disclaimer: The UK Wise Business pricing structure is changing with effect from 26/11/2025 date. Receiving money, direct debits and getting paid features are not available with the Essential Plan which you can open for free. Pay a one-time set up fee of £50 to unlock Advanced features including account details to receive payments in 22+ currencies or 8+ currencies for non-swift payments. You’ll also get access to our invoice generating tool, payment links, QuickPay QR codes and the ability to set up direct debits all within one account. Please check our website for the latest pricing information.

FAQs

Here are some frequently asked questions:

How does cash flow forecasting help in managing late payments?

Cash flow forecasting lets small businesses predict their inflow based on expected payments and outflows based on their expenses.

Businesses can also use this to predict cash shortages from late payments and to consider short-term financing options.

How important is customer communication in preventing late payments?

Having clear, upfront conversations with your customers about payment terms and deadlines helps them know what to expect and builds strong relationships. And you'll have fewer misunderstandings and disputes that could lead to payment delays.

Can small businesses use technology to improve collections beyond invoicing?

Yes, there are accounts receivable and payment management software tools that integrate customer data, automate follow-ups, and share analytics on payment behaviours.

These tools can speed up collections, identify late-paying customers, and help your business recover payments more efficiently.

Sources:

1. Late payments and payment methods in small businesses - FSB
2. The 2022 late payments report - Chaser
3. Charging interest and debt recovery: Interest on late commercial payments - GOV.UK
4. Make a court claim for money - GOV.UK
5. Make a court claim for money: Resolve your claim through mediation - GOV.UK
6. Late Payment of Commercial Debts (Interest) Act 1998 - legislation.gov.uk
7. Late commercial payments: charging interest and debt recovery when a payment becomes late - GOV.UK
8. Late Payment of Commercial Debts (Interest) Act 1998, Section 5A - legislation.gov.uk

Sources last checked on 9th December 2025