FEATURE: Credit Management – Getting tough with late payments

8th March 2017

In 2016, insurance company Zurich found that more than 53% of Britain’s small and medium sized businesses (SME) have issues with late payments with 41% of those experiencing serious cash flow problems as a result. According to Zurich’s SME risk index, £225bn is owned in late payments to British SMEs and two-thirds of UK SMEs agree that late payments do lead to SMEs being forced to close.

These alarming statistics have prompted debt recovery specialist Forbes Collect to encourage local businesses to get tough on their debtors. “As soon as payment for an invoice is late, you should not delay in implementing your credit control process. Unpaid invoices are a lot harder to recover the longer they are left. The length of time that an invoice is unpaid is often a large factor in a debt turning into a bad debt.”

The Zurich study also found that 58% of SMEs will not attempt to claim late payment compensation for fear of losing future business. “When it comes to recovering late payments, issuing a letter from a solicitor can encourage your client or customer to pay up,” said Smith. “For those worried about their business relationships, using a solicitor led service can depersonalise the whole collection process and make it easier for you to collect late payment interest and compensation.”

To help local businesses take steps against late payments, Forbes Collect has created a question and answer overview that outlines what businesses can do and how they can protect themselves against bad debt. Tom Smith Partner and Head of Dispute Resolution of Forbes Collect provides the answers.

What is the first thing you should do if you have a late paying client or customer?

As soon as payment for an invoice is late, begin your credit control process. Do not delay! I would advise that the first step in your credit control process is a seven-day demand for payment. The day after this has been posted it might be worth making a phone call to the debtor.

Making contact quickly will either mean that you receive payment or issues surrounding the invoice are flushed out as soon as possible.

Another step is to consider whether a block should be placed on your client’s/customer’s account. If they have failed to pay one invoice it may well mean that they are going to default on several more. If orders cannot be placed more people in the organisation will be made aware of the unpaid invoice – hopefully leading to payment. However, there may well be a genuine issue with the invoice; so give a couple of day’s leeway for a response to your letter prior to blocking their account.

What if they don’t respond or still won’t pay?
If payment of the unpaid invoice is still not forthcoming, I would suggest taking legal action as soon as possible. Have a set deadline in your credit control process and if payment is not received by this date pass it over for legal action. I know it may seem obvious, but it is very important, as problems such as insolvency or a disappearing debtor would be minimised.

Unpaid invoices are a lot harder to recover the longer they are left. The length of time that an invoice is unpaid is often a large factor in a debt turning into a bad debt. It is these bad debts that you normally end up writing off.

I am worried about taking legal action against a client or customer and damaging my relationship with them

I would say that instructing a solicitor led debt recovery service to take legal action actually depersonalises the whole collection process.One of our clients has commented, that they make it clear to customers that taking further action is a requirement of their insurance after 30 days. Justifying legal action in this way shows to clients or customers that the decision is not personal and is out of your hands.

This shouldn’t do any damage to your business relationship – however, I would urge you to think about whether you actually want them as a customer if they are repeatedly a bad payer.

Why is having solid payment terms important?

Having solid payment terms is just one part of your terms and conditions that are crucial to effective credit control. It is also very important that your terms and conditions are incorporated into your client/customer agreements.

Clear terms make it transparent from the outset the expectations of each party; this minimises any uncertainty and room for disagreement. In turn, this maximises your chance of being paid on time.

How do I prevent my clients and customers from paying late?

My tips to avoid late payment are:

1.Have a clear credit control procedure

2.Know your customer and obtain as much information about them as possible

3.Have clear terms and conditions

4.Credit check customers where possible

Should I add a late payment fee or interest to the debt?

If your customer is a business you are entitled to charge interest at 8% above Bank of England base rate and compensation between £40-100 on each unpaid invoice. This can be claimed 30 days after the customer receives your invoice. If your customer is an individual you are entitled to charge interest at 8% on each unpaid invoice.

Your terms and conditions may specify a rate of interest, which is known as the contractual rate. If there is such a provision in your terms and conditions, then interest can only be claimed at this rate. You cannot also claim the late payment interest and compensation.
You may wish to use interest and compensation as a penalty for you taking legal action and so may not want to include this in your final demand letter, despite being entitled to it.

interest and compensation (if applicable) are added to the debt during your Forbes Collect recovery process, thus maximising your returns.

What happens if the client or customer disputes the debt?
As soon as a client or customer disputes the debt I would suggest getting legal advice. You need to be fully advised and clear about your legal position prior to entering into negotiations or discussions. Some of what is said in heated moments may not help you in the long run, so it is beneficial to have a neutral third party to discuss the matter with you.

If and when the debt is disputed, you need the very best solicitors and advisors on your team to help you make an informed and educated decision that is right for your business.

What are the pros and cons of taking a customer to court?


Your customer may take the debt more seriously when they receive a Claim from the Court. The claim often acts as an incentive for the debtor to pay the debt as they do not want to spend time and money defending the proceedings

Similarly, the prospect of a Judgment against them will act as an incentive to pay, as the judgment will have a detrimental impact on their ability to gain credit.

There are numerous ways of enforcing the judgment depending on the debtor’s circumstances e.g. Instructing the Bailiffs/Sheriffs, obtaining a Charging Order, obtaining an Attachment of Earnings, obtaining a Third Party Debt Order or an Order to Obtain Information

It is a relatively cheap way to pursue the unpaid invoice as the court fee varies from £25 to 4.5% of the value of the claim dependent on the claimed amount. This fee is recoverable from the debtor.

Using the County Court Bulk Centre means that claims are issued on the next working day and the debtor then has 14 days to respond. Therefore it is a quick and efficient way of progressing the claim.


The claim itself may not result in payment. The debtor may still refuse to make payment or ignore the claim. If this is the case we will still need to proceed to enforcement of the judgment.

The debtor may defend the claim which could lead to complex proceedings.

Enforcement of the judgment is not always successful. Numerous factors come into play such as the debtor’s assets/finances, or the debtor’s employment status.

Why should I hire a debt recovery solicitor?

Expertise and experience mean that your chances of recovering the monies owed to you are greatly improved. Debtors will often take the claim much more seriously after receiving a solicitor’s letter or a claim. Taking the step to hire a debt recovery solicitor indicates to the debtor that you are serious about recovering the unpaid invoice and are prepared to take further action.

Further, chasing debtors is a time consuming and potentially frustrating part of running a business.  Passing the debt over to a debt recovery solicitor will give you peace of mind that the debtor is being chased for payment whilst you continue with the day to day running of your business.