How to deal with late payment problems as a limited company contractor

One of the biggest causes of stress for limited company contractors and other small business owners is dealing with late-paying clients.

In fact, one of the biggest causes of business failures in the UK is poor credit management, which results in unsustainable cash flow problems.

Late payment legislation offers some protection

Although most contractors work through agencies and rarely encounter late payment issues, those who work directly for clients may face problems getting paid on time. Some agencies may also pay late on occasion.

The Late Payment of Commercial Debts (Interest) Act 1998 protects small businesses by allowing them to charge interest on overdue invoices.

The EU Late Payment Directive, which took effect on 16 March 2013, strengthened these protections.

The directive was implemented in the UK through the Late Payment of Commercial Debts Regulations, which allow businesses to charge overdue clients for ‘reasonable’ debt recovery costs in addition to interest.

Since Brexit, the Late Payment of Commercial Debts Regulations remain in force in the UK, meaning the core principles of the 1998 Act and 2013 Directive still apply.

As a contractor, you are entitled to seek compensation for late payments, including:

• Interest at the Bank of England base rate (current base rate) plus 8%.
• Reasonable debt recovery costs.

In reality, many contractors are understandably reluctant to charge interest to larger clients, as they may not want to risk losing a potential source of income.

With this in mind, here are some proactive steps you can take to maximise the chances of getting your invoices paid on time.

Tips for preventing late payment

1. Print payment terms on your invoices

Print your payment terms on all your invoices and other paperwork. This includes:

• The payment period stated in your contract (typically 7 to 30 days).
• Your limited company bank details.
• Your right to charge interest on late payments.

If no payment terms have been agreed, UK law generally assumes a 30-day payment period.

2. You have a right to charge interest on overdue invoices

Under the late payment legislation outlined above, you are entitled to charge interest at the Bank of England base rate plus 8% on overdue payments.

However, if your contract specifies a different payment period, those agreed terms normally apply.

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3. Do you know who to contact in the accounts department?

When you start a new contract, make sure you have a contact in the agency or end client accounts department. Many contractors learn this the hard way.

4. Be proactive if a payment is late

If your invoice is not paid on time, you must be proactive. Follow up the accounts department with a polite phone call or email reminder before becoming more forceful with your request for payment if necessary.

If you use accounting software such as FreeAgent, you can check the status of any outstanding invoices and send reminders automatically.

5. Make sure you’re paid via a modern payment method

Your contract should specify how often you will be paid and how payment will be made.

Faster Payments is normally the quickest method, although many companies still pay via BACS, which can take a few days. Outdated methods such as cheques are now rarely used.

6. Can you offer an incentive for prompt payment?

Some businesses offer more favourable rates for prompt payment. This approach is more common among freelancers than contractors, as many contractors charge a fixed daily rate.

7. Credit check recruiters and direct clients

If you’re working directly with a client, especially for the first time, consider running a credit check to assess their creditworthiness.

You can also look them up on Companies House to review their accounts and check whether they submit filings on time.

8. Be calm and proportionate when chasing late payers

Although late payment can be stressful, try to remain proportionate when complaining about an unpaid invoice. There may be a genuine reason why payment has not been made.

In our experience, late payments are usually resolved fairly quickly and are often due to administrative errors. Make sure your invoice details and bank details are correct before assuming anything else has happened.

9. Outsource the problem to a debt collection agency

In extreme cases, consider using a debt recovery agency. You can easily find dozens of companies that will do this for a one-off fee or a percentage of the outstanding debt.

The older the debt, the higher the commission you are likely to pay. We’ve recommended Safe Collections for over a decade. Mention Contract Eye, and you might get a discount (we don’t get paid for saying this).

10. Compensation for debt recovery costs

Although this should be a last resort, it’s useful to know that you can charge clients for debt recovery costs under UK law.

In addition to interest on late payments, the legislation allows businesses to claim fixed compensation for debt recovery:

• £40 on debts up to £999.99.
• £70 on debts from £1,000 to £9,999.99.
• £100 on debts over £10,000.

These are statutory compensation amounts introduced under the Late Payment regulations and remain in force in the UK.