How to deal with late payments & avoid them

Summary

Key Takeaways

Late payments can seriously disrupt your cash flow, making it harder to cover day-to-day costs, invest in growth, or plan with confidence.
Customers may be late with payments for many reasons, from wider economic pressure and cash flow issues to poor internal processes or disputes over invoices.
If you can prevent late payments in the first place, that is often the best approach. Clear payment terms, regular invoice reminders, and flexible payment plans can all help reduce delays. You can also encourage faster payment by applying late payment fees or interest where appropriate.
When you are faced with late payments, there are steps you can take to recover the money, including sending a formal late payment letter, working with a debt collection agency, or pursuing legal action if needed.

Late payments can quickly disrupt businesses of any size. Even a single overdue invoice (usually beyond 30 or 60 days) can strain your cash flow, make it harder to pay your own bills, and limit your ability to invest in growth. In fact, unpaid invoices contribute to around a quarter of all business failures. While you could send a late payment letter or pursue debt recovery through legal action, this can be costly, time-consuming, and still doesn’t guarantee payment.

However, there are proactive steps you can take to manage missed payments, recover what’s owed to you, and reduce the risk of them happening in the first place.

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What is a late payment?

A late payment is the amount of money owed to a business, lender or service provider after the payment due date (or grace period) has passed.

Whether a payment is late depends on the agreed payment terms – in the public sector, terms are usually set at payment within 30 days. In the private sector, you can expect 60-day terms. Anything longer than that must be agreed upon and must be fair to both businesses.

If there’s no agreement in place, the law states payment should be made within 30 days of the customer either receiving the invoice or delivery of the goods or service (whichever is later). Otherwise, it’s a late invoice payment.

Reasons for late payments

There’s no shortage of reasons for people being late with payments. Some might be more understandable than others, such as global supply chain issues or the ongoing war in Ukraine.

There are, however, many less valid reasons for a delayed payment, including:

Poor management, such as a client’s unspoken ‘delayed payment’ policy
Customer reliance on cheap credit and failure to properly read market conditions
Withholding payment to dispute the order.

In the unpredictable climate of 2026, be cautious of clients operating on large amounts of debt or in price-competitive and price-sensitive markets. If their costs soar and/or demand drops, they’ll be under increasing pressure to fulfil supplier payments.

Our resounding advice to businesses when it comes to delayed payments is to proceed with caution.

The impact of late payments on businesses

According to government statistics in January 2026, late payments cost the UK economy almost £11 billion per year and close down 38 UK businesses every day. However, there’s nothing new about the damaging effects of missed payments. Over 1.5 million businesses are affected by late payments, according to government research.
UK businesses are collectively owed around £26 billion in overdue payments at any one time, with each affected business waiting on an average of £17,000 due to late payments.
Around 22% of surveyed businesses said they spend valuable staff time chasing late payments, an average of 86 hours per affected business each year. Across the wider economy, that adds up to around 133 million hours of staff time lost annually to pursuing unpaid invoices.
Around 15% of surveyed businesses say they’ve chosen not to work with certain customers altogether due to poor payment behaviour.

When late payment impacts cash flow

When customers pay late, these commercial debts can turn your accounts receivables into bad debts, causing either a temporary or permanent loss of cash. This loss of cash impacts your financial projections and potentially those of other businesses in your ecosystem in a dangerous cash flow domino effect.

Here are some of the other implications of running into cash flow problems:

You may have to delay paying your own invoices
You may have to borrow money to cover your expenses
Employees may not get paid on time
You may be forced to lay off employees
You may not be able to deliver products or services on time
Credit may be more difficult to get in the future
You may find it more difficult to attract new customers and business partners
You may even be forced out of business.

Late payments also cost your business time and money. Sorting out late payment letters means time taken out of your core business, additional working hours spent, and costs incurred from a short-term loan or overdraft to cover the shortfall in income.

Debt collection regulation, late payment fees and late payment interest

The collection of non-payment of commercial debt is generally covered by law. Legal frameworks exist in some countries relating to when a payment is considered “late”. They also cover the kinds of fees, penalties and interest that can be levied to recoup any additional costs. However, these laws are not applied worldwide.

Below are some common questions regarding late payments.

Can I charge a late payment fee in the UK?

Yes, you can charge a late payment fee on an overdue invoice.

Do I have to tell my customers about late payment fees?

You must tell your customers about your late payment fees before they make a purchase. Include your late payment fees in your terms and conditions or by sending them a separate notice.

When can I charge a late payment fee?

You can request a late payment fee if your customer fails to pay their invoice within the agreed payment terms. The agreed payment terms should be clearly stated on your invoice.

How do I charge a late payment fee?

You can charge a late payment fee by sending your customer an invoice with the fee added. You should also send your customer a reminder that their payment is overdue.

Should I always charge a late payment fee?

It depends. Late payment charges can be a sensitive matter, especially when you’re dealing with loyal, long-standing customers who may have run into some short-term cash flow problems and are temporarily struggling to settle their invoices. It’s probably wise to offer some flexibility in these cases. You may want to consider waiving some of the fees or creating a payment plan to maintain positive relationships with these customers.

Can I also charge interest on outstanding debts?

In addition to late payment fees, you can also charge interest on overdue invoices. For example, in the UK, the Late Payment of Commercial Debts Act 1998 and its 2013 amendment entitle suppliers to collection costs incurred as well as a late payment interest at 8% above the Bank of England base rate.

How much to charge for late payment

The amount of any late payment fee is set by law, and it depends on the value of the invoice.

Late payment legislation in the UK sets three late payment bands:

For invoices up to £999, the maximum fee is £40.
For invoices between £1,000 and £9,999, the maximum fee is £70.
For invoices over £10,000, the maximum fee is £100.

Chasing a late payment from overseas

Unfortunately, the Late Payment of Commercial Debts Act 1998 doesn’t extend beyond the UK. Many countries, even entire regions, lack any legislation when it comes to charging late fees for unpaid invoices.

Your chances of recovery are better if you trade in Europe or North America. For example, the US, UK, Netherlands, and Scandinavia have legal frameworks covering late payments. Wherever you trade, it’s always sensible to take professional advice and use a reputable international debt collection agency to save you time, hassle and the expense of pursuing money owed.
In the European Union, legislation first introduced in 1998 supports the statutory right of companies to collect interest for late payments. EU regulations indicate that debtors will be forced to pay interest and reimburse the reasonable recovery costs of the creditor if they do not pay for goods and services on time (60 days for business and 30 days for public authorities).

For example, you can claim compensation for reasonable costs in recovering the incurred debt as well as an additional late payment fee, depending on the size of the unpaid debt. These terms should be made clear in your customer agreement. The late payment fee will encourage your client to pay now if they want to avoid more costs further down the line.

Croner’s Reference Book for Exporters is a useful resource for information on trade practices, as are our country reports and collection profiles.

Act swiftly with a late payment letter

To avoid late payments getting out of hand, chase the outstanding invoice quickly and send an unpaid invoice letter. You should include:

Details of both companies (name, address)
Date of your letter
Key contact at your company
Payment references, invoice number
Total owed + interest/penalties (explain these charges if you add them)
Explain clearly that the payment is past its due date and the customer has breached terms
Refer to previous communications
State what happens next, including the final payment date and the consequences if your customer still won’t pay (debt collection, associated interest and penalties, legal proceedings).

You should aim to handle these situations with understanding and tact. Using an intermediary can help maintain good relations to mitigate the tension between customer and supplier.

How a debt collection expert can help

There is only so much you, as a supplier, can do to recover a late payment if there’s a substantial distance between you and your client. The global debt collection expertise of a specialist trade credit insurer like Allianz Trade can help by providing a local presence.

If the matter does go to court, you’ll need at least the following documentation to make your best case:

The signed contract between supplier and buyer. This can be terms and conditions, a sales agreement, contract of sale, etc. This proves the goods or services were ordered.
Shipping invoices, delivery confirmation, etc. (again, signed) to indicate the goods or services have been provided.

How to avoid late payments from the start

Late payment issues can often be prevented with careful preparation before entering into an agreement with a client. If you take the right steps early, you can reduce the risk of overdue invoices and protect your cash flow. There are three important steps to follow:

Assess your customers’ creditworthiness – review their payment history, credit reports, and overall reputation.
Negotiate clear and appropriate payment terms and credit limits to set expectations from the start.
Have any terms reviewed by a qualified solicitor, especially import and export agreements.

Before any work begins or orders are placed, make sure all agreements are signed and dated. While you can reference terms on invoices, these alone don’t prove acceptance of the agreement.

Striking the right balance is crucial; late payment can disrupt cash flow and risk insolvency, but overly cautious credit policies may cost opportunities. Trade credit insurance helps manage this balance by providing insights into customers’ creditworthiness and protecting your company against bad debt.

FAQs about late payments

How many days late is considered a late payment?

Credit protection in business refers to the practices and tools used to reduce the risk of losses from customer non‑payment, including monitoring, credit checks, and credit protection insurance.

What is the new late payment law in the UK?

The new UK late payment rules aim to tackle overdue commercial payments, especially for SMEs. They include stronger enforcement powers for the Small Business Commissioner, limits on payment terms (normally 60 days), and measures to ensure suppliers are paid on time.

How do I apologise for a late payment?

The important thing is to be prompt and professional. Start by acknowledging the delay, explain the reason if appropriate, commit to a clear payment date, and thank the recipient for their patience. Clear communication will help maintain your business relationships.

Can a late payment affect my credit score?

Yes, a late payment can affect your credit score if it’s reported to credit reference agencies. If you consistently pay invoices late, or not at all, this can lower your score, which makes it harder or more expensive to access credit in the future.

How long do late payments stay on my credit report?

Late payments normally stay on your credit report for up to six years from the date they were recorded. Their impact on your score is usually strongest in the early years and can lessen over time, especially if you return to making prompt payments.