Collecting slow paying debts

Late payment remains one of the most common causes of cash flow pressure for small businesses. Even profitable businesses can struggle if invoices are not paid on time. The good news is that there are several practical options available to improve collections, ranging from simple internal processes to more formal recovery action.

Start with clear credit control procedures

The first step is to ensure that your processes are working properly. Invoices should be issued promptly and include clear payment terms, due dates and bank details. A structured follow up system is essential. This typically involves sending a polite reminder a few days before the invoice is due, followed by firmer chasers once the deadline has passed.

It is often helpful to pick up the phone. A direct conversation can resolve misunderstandings, identify disputed invoices early, or secure a firm commitment to pay. Building a relationship with the person responsible for payments in your customer’s business can also make a significant difference.

Statutory interest and debt recovery costs

If a business customer pays late, you have a statutory right to charge interest and claim debt recovery costs under the Late Payment of Commercial Debts (Interest) Act 1998. The interest rate is set at 8% above the Bank of England base rate. You can also claim a fixed sum for the cost of recovering the debt, which ranges from £40 to £100 depending on the size of the invoice.

While you may choose not to apply these charges to every late paying customer, reminding them of your right to do so can be an effective way to encourage prompt payment.

Using a debt collection agency

If internal efforts fail, you might consider using a commercial debt collection agency. These agencies specialise in recovering unpaid invoices and can often achieve results where internal credit control has stalled. Their involvement signals to the debtor that you are serious about recovering the money.

Debt collection agencies typically operate on a 'no win, no fee' basis, taking a percentage of the recovered amount. While this means giving up a portion of the debt, it is often preferable to writing the invoice off entirely.

Mediation and dispute resolution

Sometimes invoices remain unpaid because of a genuine dispute over the goods or services provided. In these cases, mediation can be a faster and more cost effective way to reach an agreement than going to court. A neutral mediator helps both parties discuss the issue and find a mutually acceptable solution.

Legal action as a last resort

If all other avenues have been exhausted, you may need to consider legal action. For debts up to £10,000, the small claims track of the County Court provides a relatively straightforward and low cost way to pursue payment. You can start the process online using the Money Claim Online service.

Before taking legal action, it is important to consider whether the customer actually has the means to pay. If they are insolvent, spending money on court fees may simply increase your losses. A quick check of their credit rating or recent filings at Companies House can provide useful insight into their financial position.

Protecting your business in the future

Prevention is always better than cure. To minimise the risk of late payment in the future, consider carrying out credit checks on new customers before offering credit terms. You could also ask for a deposit or partial payment upfront, particularly for large orders or bespoke work.

Reviewing your terms and conditions to ensure they clearly set out your payment expectations and the consequences of late payment is also a sensible step. By taking a proactive approach to credit control, you can protect your cash flow and reduce the time and stress involved in chasing slow paying debts.