How to Chase Late Payments: A Practical Guide for UK Small Businesses

Chase late payments with a step-by-step escalation. Send a nudge on day one, a firm reminder on day seven, an interest notice around day fourteen, and a letter before action around day thirty. Under the Late Payment of Commercial Debts (Interest) Act 1998 you can add interest at base rate plus 8% and compensation of £40 to £100 per invoice.

That is the short answer. Below you will find the full playbook: your legal rights, the escalation timeline, four copy-paste templates, a worked interest calculation, mediation versus court, and prevention. It sits alongside our broader guide to cash flow management for small business, because every overdue invoice you collect is cash you do not have to borrow.

Why Late Payments Are a Genuine Threat to Small Business Cash Flow

A profitable business can still fail if its customers pay slowly. When invoices go unpaid, you still owe your suppliers, your staff and HMRC on time. The gap between money owed to you and money you must pay out is where cash flow crises begin.

Late payments create three problems. First, you fund your customers from your own working capital. Second, forecasting becomes unreliable when money arrives on the customer’s schedule. Third, every hour spent chasing is an hour not spent winning new work.

Many owners delay chasing for fear of damaging the relationship. In practice, customers who intend to pay rarely object to a polite, organised reminder system. The ones who object are often the ones who were never planning to pay promptly.

Know Your Legal Rights: The Late Payment of Commercial Debts (Interest) Act 1998

The Late Payment of Commercial Debts (Interest) Act 1998 gives suppliers an automatic right to charge interest and claim fixed compensation on overdue commercial invoices. You do not need a clause in your contract. The right applies automatically to business-to-business transactions.

There is one important limit: the Act covers business-to-business and public sector debts. It does not apply to invoices owed by consumers. If your customer is an individual buying for personal use, different rules apply and you should rely on your contract terms instead.

How statutory interest works

Statutory interest is set at the Bank of England base rate plus 8 percentage points per year. The rate is fixed in six-month blocks, using the base rate in force on 31 December (for debts that fall overdue between January and June) or 30 June (for debts overdue between July and December).

At the time of writing (August 2026), the Bank of England base rate is 3.75%, so the statutory rate for the whole of 2026 is 11.75% a year. Interest is simple, not compound, and it runs daily from the day after the payment due date until the day you are paid.

The formula is:

Interest = amount owed × 11.75% ÷ 365 × number of days late

Here is a worked example. You invoice a client £2,500 with payment due on 1 June 2026. The client still has not paid 45 days later.

• Daily interest: £2,500 × 11.75% ÷ 365 = £0.80 per day
• Interest for 45 days: £0.80 × 45 = £36.22
• Fixed compensation for a £2,500 debt: £70 (see the bands below)
• Total you can add to the invoice: £106.22

That is £106.22 on a single £2,500 invoice, before you have even picked up the phone. The numbers grow quickly on larger or older debts, which is why mentioning statutory interest in your reminders is so effective.

If no payment date was agreed, the law implies one: payment becomes late 30 days after the later of the delivery of the goods or services and the date the customer receives your invoice. For agreed terms between businesses, the maximum is normally 60 days unless a longer period was expressly agreed and is not grossly unfair to you.

Fixed compensation per late invoice

On top of interest, the Act lets you claim a fixed sum per overdue invoice. The bands are:

Claim it once per late invoice, not per customer or per reminder. It is meant to cover recovery costs, and if your reasonable costs (for example, an agency or solicitor) exceed the fixed sum, you can claim the difference. Both interest and compensation sit outside the scope of VAT.

Before You Chase: Check Your Contracts, Invoices and Records

Strong chasing starts before the first email. Gather everything that proves the debt is real, agreed and overdue:

• The signed contract, proposal or written acceptance of your quote
• The invoice, with the correct invoice number, date, amount and payment terms
• Proof of delivery or completion: delivery notes, timesheets, sign-off emails or project reports
• Every email or message about the invoice, including any promises to pay
• A statement of account if the customer owes you for more than one invoice

Check the payment terms you agreed. If your invoice says 30 days and 30 days have passed, the debt is late. If you never agreed terms, the 30-day implied term described above applies.

Also check your own invoice for errors before you chase. A wrong purchase order number, an incorrect address or a miscalculated total is one of the most common reasons invoices sit unpaid. If your invoice is wrong, fix it and resend it rather than chasing a debt the customer cannot process. Clean records also make your accounts far easier to read, as we explain in our guide to how to read and analyse financial statements.

The Four-Stage Escalation Timeline

Chasing works best as a sequence. Each stage is firmer than the last and gives the customer a fair chance to pay before you escalate:

Adjust the days to fit the customer and the amount, but keep the sequence consistent, documented and always moving forward.

Stage 1: Day 1, the polite nudge

Send a short email the day after the due date, assuming the invoice was missed rather than ignored, and attach the invoice again. Email the accounts contact directly if you have one, rather than your day-to-day contact. Template 1 below gives you the wording.

Stage 2: Day 7, the firm reminder

If the nudge produced no payment within a week, send a firmer email and follow up by phone. State the invoice number, amount, original due date and days overdue, and ask for a specific payment date. If they raise a problem with the invoice, resolve it immediately so it cannot be used as an excuse later. Template 2 covers this.

Stage 3: Day 14, the statutory interest notice

At two weeks overdue, get formal. Send a written notice stating that you are applying statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998 at 11.75% a year, plus the fixed compensation for the invoice size, and show your calculation. Many customers pay at this point because the debt is visibly growing each day. Template 3 gives you the wording.

Stage 4: Day 30, the letter before action

If a month has passed with no payment, send a letter before action: a formal demand giving a final deadline, commonly 14 days, to pay the full amount including interest and compensation, stating that you will start court proceedings if it is not paid. Courts expect you to have tried to resolve the dispute first, so keep proof you sent it, and never threaten action you will not take. Template 4 covers the wording.

Copy-Paste Email and Letter Templates

These four templates match the four stages above. Replace everything in square brackets with your details, and adjust the tone to fit the relationship.

Template 1: Day 1 polite nudge

Subject: Gentle reminder: invoice [INV-123] for £[amount] was due [due date]

Hi [Client Name],

I hope you are well. I am writing with a quick reminder that invoice [INV-123] for £[amount], dated [invoice date], was due for payment on [due date].

I have attached a copy of the invoice for ease of reference. If payment has already been made, please ignore this email. If there is a query with the invoice, please let me know and I will sort it out straight away.

Many thanks,
[Your Name]
[Your Business Name]
[Your Phone Number]

Template 2: Day 7 firm reminder

Subject: Overdue: invoice [INV-123] for £[amount], [X] days overdue

Hi [Client Name],

I am following up on invoice [INV-123] for £[amount], which was due on [due date] and is now [X] days overdue.

Please confirm by return when payment will be made. If there is a problem with the invoice or you need anything from me to release payment, please tell me today so we can resolve it.

If payment is not received within the next 7 days, I will need to apply statutory interest and compensation under the Late Payment of Commercial Debts (Interest) Act 1998.

Kind regards,
[Your Name]
[Your Business Name]
[Your Phone Number]

Template 3: Day 14 statutory interest notice

Subject: Formal notice: statutory interest now applies to invoice [INV-123]

Dear [Client Name],

Invoice [INV-123] for £[amount], due on [due date], remains unpaid [X] days after the due date despite my reminders of [date of reminder 1] and [date of reminder 2].

I am now applying statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998. The current statutory rate is 11.75% per year (the Bank of England base rate of 3.75% plus 8 percentage points). Interest has been running daily since [day after due date].

Calculation to date:

• Interest: £[amount] x 11.75% / 365 x [X] days = £[interest]
• Fixed compensation (debts of £[band]): £[40, 70 or 100]
• Total now due: £[total]

Please arrange payment of £[total] within 7 days of this notice. Interest will continue to accrue daily until the debt is paid in full.

Yours sincerely,
[Your Name]
[Your Business Name]
[Your Phone Number]

Template 4: Day 30 letter before action

Subject: Letter before action: invoice [INV-123], £[total] now due

Dear [Client Name],

I write regarding invoice [INV-123] for £[amount], due on [due date], which remains unpaid [X] days after the due date. Including statutory interest and fixed compensation under the Late Payment of Commercial Debts (Interest) Act 1998, the total now due is £[total], and interest continues to accrue daily.

This is a formal letter before action. Unless I receive payment in full within 14 days of the date of this letter, I intend to start county court proceedings to recover the debt, together with interest, compensation and court fees, without further notice.

If you dispute any part of this invoice, please set out your reasons in writing within the same 14-day period so that we can try to resolve the matter.

Yours sincerely,
[Your Name]
[Your Business Name]
[Your Phone Number]

Mediation vs Court: Choosing the Right Next Step

If the letter before action does not produce payment, you have two broad routes: mediation and court. The right choice depends on the amount, the relationship and whether the debt is disputed.

Mediation and the Small Business Commissioner

Mediation uses a neutral third party to help both sides reach an agreement. It is usually faster and cheaper than court, and it keeps the door open for a continuing business relationship.

For disputes with larger businesses, the Office of the Small Business Commissioner is a useful first port of call: a free, UK government-backed service that helps small businesses resolve payment disputes with bigger customers. For larger or complex disputes, private mediation is another option, but a mediator cannot impose a decision, so both sides must engage. If the customer simply will not communicate, court is the realistic route.

Money Claims Online: the small claims route

For straightforward unpaid invoices, Money Claims Online (MCOL) is the government’s online service for starting a county court money claim in England and Wales. Claims of £10,000 or less are normally allocated to the small claims track, which is designed to be used without a solicitor.

You will need the customer’s correct legal name and address, the amount owed (including interest and compensation, calculated up to the date of issue), and a brief description of the debt. The court fee depends on the amount claimed:

Check the current EX50 fee schedule on GOV.UK before filing, as fees change periodically. If you win, the court can order the customer to reimburse your fee, but each side generally bears its own legal costs in the small claims track.

Weigh the commercial reality before filing: action against a temporarily struggling customer may end the relationship without producing quick cash, while a filed claim often prompts payment from one who can pay but chooses not to. For smaller undisputed debts, a debt collection agency working on commission or a fixed fee is a practical alternative. Compare the cost with the court fees above.

Special Situations: Disputed Invoices, Struggling Clients and Valued Customers

Not every late payment fits the standard timeline. Here is how to handle the three situations that come up most often.

The customer disputes the invoice. Pause escalation and resolve the dispute first: ask for the objection in writing, check it against your contract and delivery records, and respond with evidence. Ask for any undisputed portion to be paid immediately. If the dispute is a stalling tactic, say so in writing and restart the escalation.

The customer is in genuine financial trouble. A customer who cannot pay differs from one who will not. Agree a short, written payment plan with fixed dates, making clear the full balance remains due, and resume escalation if a plan payment is missed. Do not keep supplying on credit to a customer who cannot pay existing invoices. Our guide to building an emergency fund for your business explains how a cash buffer protects you when a major customer stumbles.

The customer is valuable and you want to keep them. Keep every message factual and professional, never personal, and frame the process as standard policy applying to all clients. Disciplined credit control usually earns respect. If the relationship matters more than the interest, you can waive the interest as a goodwill gesture once the principal is paid. Choosing that from strength is very different from never asking.

How to Prevent Late Payments: Contracts and Payment Terms That Protect You

The cheapest invoice to chase is the one that never goes late. Build these protections into how you sell:

• Put payment terms in writing before you start work. State the number of days, the due date basis (for example, 30 days from invoice date) and what happens on late payment, including your right to statutory interest and compensation. A short set of written terms and conditions, accepted before work starts, is enough for most small businesses.
• Invoice promptly and accurately. Invoice the day the work is done, with the correct purchase order number, address and a clear breakdown. Every error gives the accounts team a reason to set your invoice aside.
• Make payment easy. Offer bank transfer details on every invoice, and consider card payments or direct debit for regular clients. The fewer steps between receiving your invoice and paying it, the faster you get paid.
• Take deposits or staged payments on larger jobs. A deposit of 30 to 50 percent for new clients, or milestone payments on long projects, means you are never funding the whole job yourself. If a new client refuses any upfront payment, treat that as useful information about risk.
• Check credit before offering generous terms. For larger orders, run a basic credit check or ask for trade references. It takes minutes and can save you months of chasing.
• Chase on the due date, not a month later. The businesses paid fastest are those whose customers know a reminder arrives the day after the due date. Automate this in your accounting software if you can.
• Consider early payment incentives carefully. A small discount for payment within 7 or 14 days can speed up cash flow, but only offer it if your margins can absorb it. Build the cost into your pricing rather than giving away profit.
• Include a right to suspend work. A clause letting you pause further work while invoices are overdue is one of the strongest practical deterrents, provided it is in your written terms.

Finally, plan for late payment in your business budget: assume some customers pay late and keep a cash buffer to cover the gap. Prevention reduces late payment; planning stops the rest from threatening the business.

FAQs: Chasing Late Payments in the UK

How long should I wait before chasing a late payment?

Start the day after the due date. A polite nudge on day one is not aggressive, it is good credit control. The longer you wait, the lower in the customer’s payment queue you fall, and the harder the debt becomes to collect.

Can I charge interest if my contract does not mention it?

Yes, for business-to-business debts. The Late Payment of Commercial Debts (Interest) Act 1998 gives you the right to statutory interest automatically, whether or not your contract mentions it. The right only falls away if you agreed your own rate that counts as a substantial remedy for late payment.

What is the statutory interest rate for late payments in the UK in 2026?

The statutory rate is the Bank of England base rate plus 8 percentage points. With the base rate at 3.75%, the statutory rate is 11.75% a year for the whole of 2026. The rate is reset in six-month blocks from the base rate in force on 31 December or 30 June, so always check the current rate before calculating.

How much compensation can I claim per late invoice?

The fixed compensation is £40 for debts under £1,000, £70 for debts from £1,000 to £9,999.99, and £100 for debts of £10,000 or more. You claim it once per late invoice, on top of the interest. If your reasonable recovery costs exceed the fixed sum, you can claim the difference too.

Does the late payment law apply to consumers?

No. The 1998 Act applies to business-to-business and public sector debts. If your customer is a private individual, rely on your contract terms and the general law of contract instead. For consumer debts, separate rules govern what you can charge and how you must chase.

Should I still chase if the customer disputes the invoice?

Yes, but deal with the dispute first. Ask for the objection in writing, answer it with evidence from your contract and delivery records, and ask for any undisputed portion to be paid immediately. Pause interest threats while a genuine dispute is being resolved, but restart the escalation if the dispute turns out to be a stalling tactic.

What is a letter before action?

A letter before action is a formal written demand for payment, giving the customer a final deadline (commonly 14 days) before you start court proceedings. Courts expect you to have sent one before filing a claim, so keep proof of postage or delivery. Only send one if you are genuinely prepared to go to court.

How much does it cost to take a customer to small claims court?

In England and Wales the 2026 court fee is £35 for claims up to £300, £205 for a £5,000 claim and £455 for claims up to £10,000. If you win, the court can order the customer to reimburse the fee. Check the current EX50 schedule on GOV.UK before filing.

Will chasing late payments damage my client relationships?

Rarely, if the process is professional. Most late payments come from disorganisation, not malice, and a clear reminder system is simply part of doing business. Keep every message factual and courteous.

Can I use a debt collection agency instead of going to court?

Yes. Agencies typically charge a commission on what they recover or a fixed fee per debt. Compare that cost with the court fees above, and check the agency’s reputation and its compliance with industry standards before instructing it. Remember that your reasonable recovery costs above the fixed compensation sum can be claimed from the debtor.

What if the customer has gone bust?

If the customer is insolvent, join the queue of creditors by submitting a proof of debt to the administrator or liquidator. You will usually recover only a fraction of what you are owed, if anything. This is why deposits, staged payments and credit checks matter: they limit your exposure before trouble starts. For larger exposures, consider trade credit insurance.

Do I have to pay tax on interest and compensation I receive?

Interest and compensation you receive are generally taxable as business income, so include them in your accounts and speak to your accountant if unsure. Our overview of tax planning strategies for small business owners covers keeping your tax affairs organised.

Conclusion

Chasing late payments is a process, not a confrontation. Confirm the debt is valid, then work the four stages: a nudge on day one, a firm reminder on day seven, a statutory interest notice around day fourteen, and a letter before action around day thirty. The law lets you add interest at base rate plus 8% and fixed compensation of £40 to £100 per invoice. Use mediation or Money Claims Online when letters are not enough, then fix the root causes with written terms, prompt invoicing and deposits.

Every overdue invoice you collect is cash flow you do not have to borrow. To see how faster payment fits the bigger picture, read our parent guide on cash flow management for small business. If you are new to the topic, our business finance for beginners UK guide covers the foundations.

This article is general information based on the law as it stands in August 2026. It is not legal advice. If a large sum is at stake or the situation is complex, speak to a solicitor before taking formal action.