Small Business Debt Recovery: Getting Paid What You Are Owed

The Late Payment of Commercial Debts (Interest) Act 1998 gives every UK business an automatic, statutory right to charge interest and claim compensation when another business pays late. You do not need to have included these terms in your contract — they apply by default.

• Statutory interest: 8% per annum above the Bank of England base rate. This accrues daily from the date payment was due.
• Fixed compensation:
  • £40 for debts up to £999.99
  • £70 for debts between £1,000 and £9,999.99
  • £100 for debts of £10,000 or more
• Reasonable recovery costs: If your actual costs of recovering the debt exceed the fixed compensation, you can claim the difference.

The Act only applies to business-to-business transactions. It does not apply to debts owed by individual consumers.

Payment terms cannot exceed 60 days unless both parties expressly agree and it is not "grossly unfair" to the supplier. The default payment period (if no terms are agreed) is 30 days from delivery of goods/services or receipt of invoice, whichever is later.

1. Invoice promptly and clearly — include your payment terms, bank details, the due date, and a reference number. State on the invoice that late payment interest will be charged.
2. Follow up immediately when overdue — call or email within 1–3 days of the due date. Many late payments are simply oversights.
3. Send a formal reminder — a written reminder referencing the invoice number, amount, and due date. State that interest is accruing.
4. Send a Letter Before Action — give the debtor 30 days to pay. Include the statutory interest and compensation calculated to date.
5. Consider mediation — if there is a dispute about the work or the amount, mediation can resolve it faster and cheaper than court.

Money Claims Online (MCOL): For debts up to £100,000, this is the fastest and cheapest route. You can issue a claim online, and if the defendant does not respond within 14 days, you can request default judgment.

Small claims track (under £10,000): The key advantage for small businesses is the no-costs rule. Even if you lose, you will not normally be ordered to pay the other side's solicitor fees. This makes it low-risk to pursue smaller debts yourself.

Fast track (£10,000–£25,000): More formal, with fixed costs and a trial window of 30 weeks. You may want to instruct a solicitor for fast-track claims.

For debts owed by a company (not an individual), a statutory demand can be a powerful tool if the debt is undisputed and exceeds £750.

A statutory demand is a formal written demand under the Insolvency Act 1986. If the company does not pay within 21 days, you can petition to wind up the company (put it into compulsory liquidation). Most companies will pay rather than face a winding-up petition, because:

• A winding-up petition is advertised in the London Gazette, damaging the company's reputation.
• Banks often freeze the company's accounts when they become aware of a petition.
• Directors face personal scrutiny during the liquidation process.

Warning: Do not use a statutory demand if the debt is genuinely disputed. The court will dismiss a winding-up petition based on a disputed debt and may order you to pay the company's costs. A statutory demand is only appropriate for debts that are clearly owed and undisputed.

For debts owed by an individual, the threshold for a bankruptcy petition is £5,000. The process is similar but the consequences are different.

• Written contracts: Always have a written agreement or terms and conditions that specify payment terms, interest on late payment, and your right to suspend services for non-payment.
• Credit checks: For large orders or new clients, run a credit check through Companies House (free) or a credit reference agency.
• Staged payments: For large projects, agree milestone payments rather than a single payment at the end.
• Retention of title: If you supply goods, include a retention of title clause — you retain ownership of the goods until you are paid in full.
• Deposits: Require a deposit or upfront payment before starting work, especially for new clients.
• Act quickly: The longer a debt goes unpaid, the harder it becomes to recover. Chase immediately when an invoice becomes overdue.

This guide provides general legal information about UK law and is not legal advice. Laws and regulations change, and individual circumstances vary significantly. For advice specific to your situation, you should consult a qualified solicitor.

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