Late payments are the silent killer of UK small businesses. According to the Federation of Small Businesses, 50,000 businesses close every year because of cash flow problems — and late-paying clients are the biggest cause.
But here's what most guides won't tell you: the problem usually starts before the invoice is sent. Vague payment terms, no written agreement, and a reluctance to talk about money upfront — these are the real culprits.
This guide covers everything you need to know about setting payment terms that actually work.
What Are Payment Terms?
Payment terms are the conditions you set for when and how you expect to be paid. They appear on your invoices and (ideally) in your contracts.
Common payment terms include:
- Due on receipt — payment expected immediately
- Net 7 — payment due within 7 days
- Net 14 — payment due within 14 days
- Net 30 — payment due within 30 days
- Net 60 — payment due within 60 days
- EOM (End of Month) — due at the end of the month the invoice is issued
The term you choose has a direct impact on your cash flow. Choose wrong, and you're essentially giving your clients an interest-free loan.
What Most UK Small Businesses Get Wrong
1. Defaulting to Net 30 Because "Everyone Does It"
Net 30 has become the default, but that doesn't mean it's right for you. If you're a freelancer, sole trader, or micro-business, waiting 30 days for payment — and then chasing when it's late — can be devastating.
If your costs are front-loaded (materials, subcontractors, your time), consider Net 14 or even Net 7. Clients who value your work won't blink. Clients who push back on reasonable terms are usually the ones who'll pay late anyway.
2. Not Putting Terms in Writing
A verbal agreement about payment means nothing when the invoice is 60 days overdue. Your payment terms should appear in:
- Your contract or engagement letter (before work starts)
- Every invoice you send
- Your terms and conditions on your website
3. Being Vague About Late Payment Consequences
"Please pay within 30 days" is a suggestion. "Payment is due within 14 days. Late payments will incur statutory interest at 8% plus the Bank of England base rate, as per the Late Payment of Commercial Debts (Interest) Act 1998" is a term with teeth.
You don't have to be aggressive about it. But making the consequence clear upfront prevents awkward conversations later.
Your Legal Rights on Late Payments
Under the Late Payment of Commercial Debts (Interest) Act 1998 (amended 2013), you have the right to:
- Charge statutory interest at 8% above the Bank of England base rate on any overdue B2B invoice
- Claim compensation for debt recovery costs:
- Up to £999.99 — £40 fixed compensation
- £1,000 to £9,999.99 — £70
- £10,000+ — £100
These rights apply automatically to business-to-business transactions. You don't need to write them into your contract (though you should). You can calculate exactly what you're owed using our Late Payment Interest Calculator.
Important: These rights only apply to B2B transactions, not consumer sales.
How to Choose the Right Payment Terms
For Freelancers and Sole Traders
- Recommended: Net 14 or Due on Receipt for small projects
- For larger projects: 50% deposit upfront, remainder on completion (Net 7)
- Retainer clients: Monthly invoice on the 1st, due by the 14th
Your cash flow is your lifeline. Don't be embarrassed about short payment terms — corporate clients with net-60 terms aren't embarrassed about making you wait.
For Contractors and Tradespeople
- Recommended: Deposit + stage payments for larger jobs, Net 14 for regular clients
- CIS contractors: Remember that deductions affect your actual received amount — factor this into your cash flow planning. Our CIS Calculator can help you work out net payments.
For Service Businesses and Agencies
- Recommended: Net 14 for SME clients, Net 30 for enterprise (if you must)
- Consider: Requiring payment before project kickoff for new clients
- Ongoing services: Direct debit or standing order — removes the "forgetting to pay" excuse entirely
For Product Businesses
- E-commerce: Payment at point of sale (obviously)
- Wholesale/B2B: Net 14 to Net 30, with credit checks for larger orders
- Subscription: Monthly direct debit with clear cancellation terms
Practical Tips That Actually Work
1. Invoice Immediately
The longer you wait to invoice, the longer you wait to get paid. Send your invoice the same day the work is completed — or the same day the milestone is hit.
Better yet, automate it. If you're using Xero, set up repeating invoices for regular clients. If you're processing invoices from suppliers, our AI Invoice Importer can handle the data entry so you can focus on chasing money in, not logging money out.
2. Make Paying Easy
- Include your bank details on every invoice
- Offer card payment links (Stripe, GoCardless)
- Accept bank transfer and make the reference obvious
The fewer barriers between your client and the "pay" button, the faster you'll get paid.
3. Send Reminders Before the Due Date
Don't wait until the invoice is overdue to follow up. A friendly reminder 3 days before the due date works wonders:
"Hi [Name], just a quick note that invoice #1234 for £X is due on [date]. Let me know if you need anything from our side."
This isn't chasing — it's professionalism. Most accounting software can automate this.
4. Follow Up Immediately When Overdue
Day 1 past due: email reminder. Day 7: phone call. Day 14: formal letter referencing the Late Payment Act. Day 30: consider a debt recovery service or Small Claims Court for amounts under £10,000.
The longer you leave it, the harder it gets. And the client learns that your terms are flexible — which means they'll be late again.
5. Fire Bad Payers
This is the hardest one. But a client who consistently pays 60 days late on net-30 terms is costing you money. Factor in your time chasing, the cash flow impact, and the stress — and ask whether that client is really profitable.
Sometimes the best business decision is losing a client.
What About Early Payment Discounts?
Some businesses offer a small discount (typically 2-5%) for early payment. For example: "2/10 Net 30" means a 2% discount if paid within 10 days, otherwise full amount due in 30 days.
This can work well if:
- Your margins support it
- The cash flow benefit outweighs the discount
- You're dealing with clients who are motivated by savings
For most small businesses, though, shorter default terms are simpler and more effective than discounts.
Template Payment Terms Clause
Here's a clause you can adapt for your contracts and invoices:
Payment Terms: All invoices are due within [14/30] days of the invoice date. Late payments will incur interest at the statutory rate of 8% above the Bank of England base rate per annum, plus fixed compensation for debt recovery costs, in accordance with the Late Payment of Commercial Debts (Interest) Act 1998. We reserve the right to suspend services where invoices remain unpaid beyond [30] days.
Clear, professional, and legally grounded.
Tools to Help You Stay on Top of Payments
Managing payment terms and chasing late payers doesn't have to eat into your day:
- Late Payment Interest Calculator — work out exactly what interest and compensation you can claim on overdue invoices
- Free Invoice Cost Calculator — see how much manual invoice processing is really costing your business
- AI Invoice Importer — automate supplier invoice data entry into Xero so you can focus on getting paid, not on admin
The Bottom Line
Getting paid on time isn't about being aggressive — it's about being clear. Set your terms upfront, put them in writing, enforce them consistently, and make it easy for clients to pay.
The businesses that struggle with cash flow are usually the ones that feel awkward talking about money. Don't be one of them. Your payment terms are as important as the work you deliver.
Drakon Systems builds free tools for UK accountants, bookkeepers, and small business owners. From VAT calculations to CIS deductions to AI-powered invoice processing — we're here to save you time and money.