With the help of a useful piece of legislation, small business owners can claim back what is rightfully theirs from their customers with a little extra for the trouble.

The Late Payment of Commercial Debts (Interest) Act 1998 adds an implied term in business to business contracts for any commercial debts that are “grossly unfair” to a supplier.

A minimum of 8% a year interest over the rate set by the Bank of England and a fixed sum can be added on top of the price of goods or services that are paid for late, in addition to the reasonable costs of recovering the debt.

This does not have to be a business-to-business debt between Limited companies – the Act was designed to protect small businesses dealing with larger ones, the most recent legislation also applies to any commercial debts that exist between sole traders, partnerships, or a sole trader working with a Limited company.

What is a commercial debt?

Any debt that is owed by a commercial venture or business is a commercial debt. This is not just for trading between two Limited companies – commercial debt can come from sole traders, partnerships, or a sole trader dealing with a Limited company.

Commercial debt does not apply to consumer debts incurred by the members of the general public.

What is the late payment of commercial debts act?

Late payment of commercial debts costs British small businesses almost 2.5bn every year. Research carried out by the Lloyds Banking Group showed that 65% of firms needed more than 30 days to settle outstanding invoices and 21% of them needed more than 50 days.

This slow cash flow causes stress-induced by chasing invoices, opportunity costs from being unable to use capital that is tied up in late invoices, and even small businesses failing entirely (around 50,000 small businesses fail every year due to larger firms neglecting to settle bills).

50000 small businesses fold due to late payments each year in the UK

This may leave small business owners feeling helpless about claiming what they are owed. The late payment legislation was amended in 2018 to discourage late payment of debts and to help creditors gain compensation.

The Late Payment of Commercial Debts Act has two aims – fairly reimburse businesses for late payment and to deter businesses and public bodies from neglecting to pay in a prompt manner. The 65% of firms who were chasing invoices after 30 days can now legally claim compensation without prior agreement to a credit period.

What types of invoices should I send?

There are many different types of invoices and they largely overlap, in terms of use. A small business owner is most likely only to use 3 or 4 types of invoice, depending on the business.

A late payment invoice should be used when the late payment date has passed. This type of invoice includes everything from a standard invoice as well as a reminder for payment, the new payment date, and any additional payments which are now necessary.

There are many other different types of invoices depending on the trade and size of the business that is sending the, but a standard invoice and a late payment invoice are the most important for the purposes of this Act.

Should I just rely on the late payment of commercial debts act for payment?

No – the Act was made with the intention of deterring bigger businesses bullying small ones, not to claim all commercial debts. You can follow three helpful steps to settle outstanding debts without legal intervention:

Be proactive

Before the late payment date passes, contact the customer. Big businesses have a lot going on and sometimes things fall through the cracks. A reminder from the creditor at 15 days will give debtors two weeks to plan for payment before a late payment date of 30 days, for example.

Contact the customer

Keeping in touch with a customer will help bigger businesses to organise payments and help a debtor stay in their mind. A phone call would be better than an email, as emails can often go unread or get easily forgotten.

Be persistent

This is very different from being threatening – a reminder every few days after the invoice regarding the late payment date will help more than a threat of legal action the day before the late payment date. Be proactive, be organised, and keep in contact with your customers.

Report it! 

When all efforts fail and clients consistently and maybe even purposely delay payments you should be reporting your late and unpaid invoices.

What are the regulations?

The original Act was implemented in 1998, empowering small and medium-sized businesses to charge interest to larger businesses and public sector organisations of any size that were late to pay their debts.

How does the act define commercial debts?

The Act covers commercial debts that fulfil these 4 criteria:

1.) You have supplied goods and services

Goods or services must have been supplied to the debtor by the supplier in order for the late payment legislation to apply.

2.) Your debtor bought for business purposes

As this legislation only applies to commercial debts, this cannot be applied to any debt incurred by a member of the general public who bought for personal purposes. There must be proof that the goods or services were supplied for use in business.

3.) The contract is not a consumer credit agreement

Personal debts are not covered by the legislation. If the contract is, as defined by Article 60B of the Financial Services and Markets Act 2000, a consumer credit agreement, you will be unable to claim late payment compensation through this legislation.

4.) The contract does not contain a provision for interest on overdue invoices (or any other substantial remedy for non-payment)

Here the legislation becomes more complex – if you have agreed to terms outside of the Act, then you may be unable to claim compensation. As long as these are in place and they are not grossly unfair to the supplier or the debtor, then the contract will be used as a basis for debts, late payment interest, and any other compensation that may be incurred.

If they are unfair to the supplier, however, it may be possible to claim compensation outside of the contractual agreement.

How did the regulations change in 2018?

The amendments made in 2018 changed Regulation 3 in a way that allows representative bodies to challenge terms and practices in contracts.

Originally, the Act was exclusively for protecting small businesses with fewer than 50 employees against Limited businesses that dragged their heels in paying their debts. This changed with the 1998 amendment which strengthened the Act to cover sole traders, partnerships, and small to medium enterprises.

The late payment compensation can now be claimed by anyone who has carried out a transaction with a public organisation or a private business, regardless of size.

These amendments mean that challenges can be brought for grossly unfair contractual terms and practices with outside experts helping to guide small to medium businesses through the process.

What does grossly unfair mean?

There is no definition from the government as to what grossly unfair actually means. Instead of an exhaustive list, the regulations now intend for the courts to decide disputes concerning terms and practices which are grossly unfair.

It is expected that case law will build a definition in time and that should guide what is considered grossly unfair. Although this may seem unclear to businesses at this present time, a greater body of case law will bring greater clarity.

Due to the lack of a clear definition, expert legal advice is needed to assess sales ledgers and find claims that will be successfully judged as unfair for the supplier.

When do the regulations apply?

The regulations apply when there is a late payment of commercial debts of either 30 days for deals with public authorities or b) 60 days with business transactions.

After these time periods, debts are considered late payments.

If no time period was agreed in the contract, the late payment legislation says that the payment becomes late:

a) 30 days after the debtor receives the invoice or
b) 30 days after you deliver the goods or services, whichever is later.

What are the implications of the regulations?

If there is an unfair late payment, now it is extremely likely that a challenge can be brought against the debtor.

As the creditor can now reach out to representative bodies for analysis of contracts and offer expert advice into potential grossly unfair contractual terms and practices, they are much more likely to find the time and expertise to claim back what is theirs.

Can I delay the late period if I want to?

If you state in your contract that the agreed date of payment for delivery, invoice, or acceptance (from the date of the latest) is later than 60 days for a business transaction and the agreement is not judged as grossly unfair by the courts, then the interest will run from 60 day period after that date.

For example, if a larger business forced a small supplier to accept 90 days as the late payment date and with a 1% interest rate in a contract, the courts could judge this as unfair to the creditor and enforce the Act.

Public authorities automatically accrue interest after 30 days, regardless of agreed payment dates. This late payment period cannot be extended.

Can I choose to work outside of the act?

Officially, no one cannot contract outside of the Act. You can choose to remove the interest requirements in the contract, but there are parameters which must still be met.

Even if additional requirements which are contrary to the Act are included in a contract, grossly unfair contractual terms or failure to provide a suitable remedy to late payment can cause reversion to the Act.

The contract must have a substantial contractual remedy for the late payment. If it does not, the court will refer to the Late Payment Act and apply the principles appropriately.

The remedy within a given contract can also be judged to be unsubstantial if it does not offer sufficient compensation for debts and can be judged as unfair and unreasonable if it goes against the rights granted by the Act.

It must also serve the purpose as a deterrent for late payments. If it does not fulfill these three criteria, it is possible that the contractual agreement will be overruled in favour of the Act itself.

Courts will have access to all relevant information concerning the implementation of a contract. In addition to the judgement made on the nature of the agreement, additional consideration will be given to the nature of negotiations when the contract was signed.

This can include commercial certainty, the respective bargaining positions of the two parties, and if there was a mismatch in negotiating power which led to certain terms being imposed upon the small party.

Why should small businesses be using late payment legislation?

The Act was brought in to help small businesses stand up to larger businesses that neglected to pay promptly and fairly. Small businesses generally cannot afford to have debts go unpaid, so claiming late payment compensation can be an excellent source of effectively free income that deters bigger enterprises from paying their debts late.

Not claiming late payment of commercial debts can lead to capital being tied up in debts which can lead to restriction of business and growth as well as possibly a small business having to shut up shop. Don’t let the big boys bully you!

Do I need to inform my customers that I use this legislation?

Legally, no. The Act is an implied term – even if it is not written into a contract, or if the contract has differing stipulations that are found grossly unfair, then the Act can apply to any case of late payment of commercial debts.

It is good practice to be clear about these things in any contractual agreement, however, so explaining clearly to potential customers that late payment will incur additional payments is wise.

Won’t my customers be antagonized by this?

Possibly, and this is a big fear for many small businesses – angering larger businesses that they rely on for income. However, that does not mean that someone else can profit off your financial suffering and get away with it.

Additionally, this legislation is implemented as a statutory right. It is designed to encourage all transactions (public and private) to be dealt with promptly and fairly.

While there is a possibility for a large number of claims, the government wants to encourage businesses and public bodies to pay their debts promptly.

Think of it as a deterrent and a part of effective payment terms which can help others follow your best practices. Showing your customers that you have a robust system for claiming late payment debts shows that you are professional and prepared.

The late payment of commercial debts act empowers small businesses in 4 ways:

1.) The right to claim interest for late payment, the right to claim

Before the Late Payment of Commercial Debts (Interest) Act 1998, debts were only claimable if they were described in the contract or if the supplier sued the debtor in a court of law.

With the legislation, it was possible for creditors to legally add late payment compensation to any business transaction that fails to meet time requirements and the grossly unfair requirements.

2.) The right to claim reasonable debt recovery costs, unless the supplier has acted unreasonably

If the supplier has incurred debt due to trying to recover the debt, they may receive compensation for their troubles.

The courts can also reduce or dismiss any interest that is due to the creditor if they feel that their conduct was not appropriate in the process of reclaiming debt.

3.) The right to challenge contractual terms that do not provide a substantial remedy against late payment

If there is a contractual term relating to chasing debts or claiming compensation that is grossly unfair, then it can be challenged.

Late payment of commercial debts can incur interest and costs even if the specific wording in the contract has a longer late payment date or a longer acceptance procedure period, as long as they are judged to be grossly unfair.

4.) The right for “representative bodies” to challenge contractual terms that are grossly unfair on behalf of SMEs

Small to medium enterprises (SMEs) can search for legal help to review current contractual obligations and search for terms and conditions that are grossly unfair to the supplier.

Although small businesses may worry about annoying or chasing away larger affiliates, they are encouraged to stand up for themselves against irresponsible clients and claim what is rightfully theirs.

When can I claim?

Firstly, you do not need to inform the debtors that you are claiming Late Payment Interest or associated compensation before the late payment period has passed.

This is a big difference from before the Late Payment of Commercial Debts Act as a supplier would have needed to state in their contract the terms of late payment dates and charges.

If any business (from a sole trader to a Limited business) has paid you late for goods or a service, you may be eligible to claim compensation. This does not need to be done at the time of the late payment – retrospective claims can be brought as well.

Many business owners do not claim:

a) they may not understand the implication of the Late Payment of Commercial Debts Act,
b) they do not have the time or expertise to analyse their sales ledgers for late payments and the length of time that the payments were late by, and
c) they do not have the resources or legal backing to claim successfully.

How much can I claim?

Along with a fixed sum, there is an 8% interest rate and a possibly a compensation cost for the attempt to recover the debt. The fixed sum is set depending on the amount of debt that is owed to the creditor. This sum can only be charged to a business once per payment.

Amount of debt Fixed sum:

Up to £999.99 £40
£1,000 to £9,999.99 £70
£10,000 or more £100


Although this may seem like a small rate of compensation, this can be applied to every single debt that is owed by the debtor. When collected together, these payments quickly add up to a substantial income that doesn’t require any output from the creditor.

Claiming back what is rightfully yours will lead to effectively free money, as well as encouraging bigger businesses to deal with smaller companies in a timely fashion that doesn’t put a strain on anyone’s finances.

How is interest accrued?

The statutory interest rate is 8% plus the base rate that is set by the Bank of England.

This begins to accrue at the time set by the Act itself (that is 30 days for public entities and up to 60 days for business transactions, unless otherwise fairly stipulated in the contract) or from the agreed late payment date in the contract.

This can be claimed at any point in the future, even when trading with the debtor has ended.

How can I calculate late payment interest?

Working out the late payment interest is a simple process. You can use a commercial debt calculator, or you work it out yourself using the easy steps below:

We will use £1,000 as the debt figure for the sake of simplicity.

Your business (the creditor) is owed £1,000 by the non-paying party (the debtor). After adding the statutory interest rate (8% added to the Bank of England base rate, using 0.5% for the example), you can see that you can win 23p per day.

£1,000 is the debt owed.

The annual statutory interest rate is 8.5%

The annual statutory interest is £85 (1000 x 0.085 = 85)

The daily statutory interest is 23p (85 ÷ 365 = 0.23)

After 30 days, the statutory interest is £6.90 (30 x 0.23 = 6.9). After 50 days, this becomes £11.50 (50 x 0.23 = 11.5).

If it isn’t possible to make sure that debts are paid in a timely fashion by the debtor, then using the Late Payment of Commercial Debts Act will help small businesses use the law to protect them. Deter bigger businesses from neglecting their debts and stand up to bully tactics.

If you have any questions or queries about the regulations on unpaid commercial debts, please leave a comment below.

About the Author: Kris Broda

Krzysztof Broda Landscape resized 1 e1602958114836
As the co-founder of brodmin, Kris has more than 10 years’ experience in Trust, Fiduciary and Corporate services industry. He worked at UBS as Senior Compliance Associate and shortly moved to assist HSBC with a new project as KYC Analyst. Follow him on @realbrodmin and LinkedIn


  1. Avatar of Nick
    Nick 02/01/2021 at 12:05 - Reply

    Before reading this article I also did not understand the implication of the Later Payment of Commercial Debts Act. And there are also the resources needed to claim successfully. Why isn’t this simpler to do? Why do we have to spend so much time and money to get our owed money? Can’t things be simplified so it’s easier for businesses to get their owed money on time or at least faster when it’s clear the other party is late?

    • Krzysztof Broda Landscape resized 1 e1602958114836
      Kris Broda 02/01/2021 at 14:39 - Reply

      Hi Nick,

      Glad that you found our article insightful. I couldn’t agree more, you shouldn’t be burdened with chasing unpaid invoices. Remember to report any repeat offending clients on our directory. If they care about their reputation, they might just change their payment practices.

      • Avatar of Nick
        Nick 20/01/2021 at 18:52 - Reply

        Yes, I will do so if needed. I don’t like having to do this but I guess sometimes this is needed and they should be reported so they don’t do this again and again.

  2. Avatar of Martin
    Martin 24/01/2021 at 09:45 - Reply

    Thank you for including the calculator at the end there, Kris. That was very useful. I used it to calculate the interest for an unpaid invoice of £1,300. It’s not much but it’s money I am owed.

    • Krzysztof Broda Landscape resized 1 e1602958114836
      Kris Broda 27/01/2021 at 19:00 - Reply

      You’re welcome Martin! We modelled the interest calculator on the official UK governments website : )

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