What late payment actually costs you, in pounds
Updated: Oct 14
Parliament decided in August 2002 that if a customer pays you late, you are entitled to compensation of £40. On a bigger invoice, £100. Those figures have not moved since. Almost everything else in a British business has roughly doubled in the meantime, but the statutory price of being messed about is still £100.
Which may be why nobody claims it. It may also be why there is a Bill in its final stages in the House of Lords that would cap commercial payment terms at 60 days, make statutory interest compulsory in every commercial contract, and let the Small Business Commissioner fine large firms a percentage of turnover for persistently paying late. The government puts the cost of late payment at £11 billion a year and 38 UK businesses closing every day.
None of that helps you this month. So here is what the gap is actually worth, and what you can do about it before any of it becomes law.
What late payment actually costs you
Take an engineering firm turning over £2.4m. It invoices on 30 day terms. It gets paid, on average, on day 58. No bad debt, no disputes, nothing dramatic. Just the ordinary friction of a customer whose purchase ledger runs a monthly cycle and whose own cash is tight.
Twenty-eight days of extra funding, on daily sales of £6,575, is £184,110 of your cash sitting in somebody else's bank account. Not once. Permanently, for as long as the pattern holds.
Price that at the Bank of England base rate, 3.75% since the hold on 17 September, and the gap costs £6,904 a year. That is the floor, and the floor is fictional, because nobody borrows at base.
That example is illustrative and it is stripped down. It assumes every invoice runs the same 28 days over, no seasonality and no bad debt, and it ignores your payables side, where you are quite possibly doing the same thing to your own suppliers.
The money the law already gives you
Section 5A of the Late Payment of Commercial Debts (Interest) Act 1998 is one of the better kept secrets in British commercial life.
Statutory interest runs at 8% above base, so 11.75% today. On a £20,000 invoice that is £6.44 a day. Twenty-eight days over terms, £180. The fixed sum sits on top of it: £40 on a debt under £1,000, £70 up to £10,000, £100 above that. So £280 on one invoice, with no court involved, and you do not need it written into the contract. It is implied by statute unless your contract sets its own rate.
Run that across 120 invoices a year averaging £20,000 and the engineering firm is entitled to roughly £21,600 of interest and £12,000 of fixed sums. Thirty-three and a half thousand pounds a year, against a funding cost of seven.
Almost nobody claims it. Not because they have never heard of it, but because the customer sitting on £184,110 of your money is also the customer placing next year's order, and an invoice for £280 of statutory interest is a conversation you would rather not have in a market where somebody else will take the work. That is the real mechanism of late payment in Britain. It is a commercial asymmetry, not a legal gap, which is why legislation keeps arriving and the behaviour keeps not changing.
Three things worth doing before the Bill lands
Look the customer up before you quote. Large companies have had to publish their payment performance since 2017, and the reports sit on a public register at check-payment-practices.service.gov.uk. Search by name or company number and you get their average days to pay, the percentage settled within 30 days, and their standard terms. A buyer reporting a 65 day average is telling you what your terms will really be, whatever the purchase order says.
Put the interest on the invoice from day one. Not as a threat, as a term. One line referring to statutory interest at 8% above Bank of England base rate under the 1998 Act costs you nothing and changes the tone when you do chase, because you are citing an Act rather than asking a favour. If you have fewer than 50 employees and the late payer has more than 50, the Small Business Commissioner will look at a payment dispute where the money fell due within the last 12 months.
If the gap is structural, fund it rather than absorb it. Invoice finance exists for exactly this: a £184,110 hole that never closes. It costs money, and it is a great deal cheaper than the emergency overdraft extension you ask for at the worst possible moment, particularly if you are still servicing a bounce back or CBILS facility on top. But work out which problem you have first. As we said when we compared asset finance and invoice finance, a fair number of businesses asking for invoice finance actually have a collections problem they could fix for free. Lenders want the same thing you should want, which is a debtor book you can explain.
We broker commercial finance rather than lend it, the lender pays us on completion rather than you, and we will put that in writing before you speak to anybody. Pathfinder is not directly FCA authorised; we work through authorised partners.
The cap will arrive, the large buyers will move their standard terms from 90 days to 60 and call it a concession, and the compensation for being paid late will still be the £100 Parliament set in 2002. Worth charging at least once, if only to see what happens.
Get in touch
If slow payment is shaping your cash flow rather than the other way round, ring us and we will look at the debtor book with you.
Pathfinder FX
1 Knights Court, Archers Way, Battlefield Enterprise Park, Shrewsbury, SY1 3GA
+44 (0)1743 290955
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