Late payments: how to collect and avoid them

Updated on 15 July 2024

Late payments are responsible for a quarter of all business failures. But even one invoice late payment can cramp your cash flow. Legal measures to recoup the funds can create constraints on your time and resources. A late payment letter may not be sufficient. In this article, we discuss how to handle late payments and how to avoid them in the future.

A late payment is an amount of money a borrower sends to a lender or service provider that arrives after the payment due date has passed but before the billing cycle had ended.

Late payments can stem from a wide array of causes: management problems, market conditions, or even unpaid invoices by one of their own customers. It’s also possible that the customer is holding back payment to dispute the order.

A late payment becomes a missed payment or non payment after the payment due date has passed and the billing cycle had ended.

Whatever the reason, late payment of commercial debts can turn your trade receivables into bad debts, which amounts to a temporary or permanent loss of cash. That affects your financial projections and potentially those of other businesses in your ecosystem as well.

Late payments also cost your business time and money: writing late payment letters involves additional working hours, and covering the shortfall in income can necessitate a short-term loan or overdraft, for example.

The collection of non-payment of commercial debt is generally covered by law. Legal frameworks exist in some countries that dictate terms relating to when a payment is considered “late” and the kinds of fee, penalty and late payment interest that can be levied to recoup the additional debt collection costs. However, these laws are not applied worldwide.

Your chances of recovery are better if you trade in North America or Europe. For example, the US, UK, Netherlands and Scandinavia have legal frameworks covering late payments. In the UK, the Late Payment of Commercial Debts (Interest) Act 1998 and its 2013 amendment entitle suppliers to collection costs incurred as well as a late payment interest at 8% above base rate of the Bank of England.

Keep in mind that debt collection and its application vary widely from country to country. Some entire regions have no legislation to support suppliers. Late payment letters may be ignored. Croner’s Reference Book for Exporters is a useful resource for information on trade practices, as are our  country reports and collection profiles available here.

When your customer misses a payment deadline, chase the outstanding invoice quickly and send an unpaid invoice letter or  late payment letter, including the following information:

• Details of both companies (name, address)
• Date of your letter
• Key contact at your company
• Payment references, invoice number
• Total owed + interest/penalties (explain these charges if you add them)
• Explain clearly that the payment is past due and the customer has breached terms
• Refer to previous communications
• State what happens next, including final payment date and the consequences if your customer still won’t pay (debt collection, associated interest and penalties, legal proceedings).

The situation requires understanding and tact. Using an intermediary can help maintain good relations in order to mitigate the tension between customer and supplier.

There is only so much you, a supplier, can do to recover a late payment if you’re half a world away from your client. The global debt collection expertise of a specialist trade credit insurer such as Allianz Trade in Canada can help by providing a local presence, removing language barriers and time zone issues, and reaching out to the customer locally.

If the matter does go to court, you will need at least the following documentation to make your best case:

• The signed contract between supplier and buyer. This can be terms and conditions, a sales agreement, contract of sale, etc. This proves the goods or services were ordered.
• Shipping invoices, delivery confirmation, etc. (again, signed), to indicate the goods or services have been provided. 

The more preparation you put into defining an agreement beforehand with your client, the fewer problems you are likely to have with late payments. Three important steps:

1. Assess your customers’ creditworthiness – their ability to pay on time, their credit report, payment history, and reputation.
2. Negotiate clear and appropriate payment terms and set credit limits
3. Have the terms and conditions reviewed by a qualified solicitor who has experience with export and import.

Once you’re ready to execute the agreement, be sure the pages are signed and dated (electronically-generated and signed/dated agreements are increasingly acceptable for legal purposes) before any order is placed or work is begun. It’s okay to replicate these terms on the back of your invoice, but this alone is not sufficient to prove the validity of the agreement: invoices are issued after an offer has been accepted. Invoices in and of themselves do not signal an accepted agreement.

Remember: late payment of commercial debts can disrupt your cash flow and lead to insolvency. But overly conservative credit decisions can result in missed opportunities. Striking the right balance is critical to maximising your company's bottom line. Trade credit insurance helps you find this balance by providing information on your customers’ creditworthiness and protecting your company against bad debt.