Sir Richard Branson was quoted as saying “Never take your eyes off the cash flow, because it’s the lifeblood of business.”

Even the most ambitious of businesses cannot survive without a steady cash flow. If your own commercial clients fail to pay for your goods or services promptly, or even pay at all, then help can be at hand under The Late Payment of Commercial Debts (Interest) Act 1998.

In this article Senior Solicitor Shoghig Moskofian a member of  our experienced Litigation and Disputes team discusses the Act and how it can be used to keep your cashflow on track, whilst re-educating your clients as to what constitutes good payment behaviour. 

If you are a business – from any sector, with cash flow issues please contact your local Kingsfords office in Ashford, Cranbrook or Hythe to discuss how we can help. Alternatively, you can Get In Touch via our website enquiry icon, or by calling us on 01233 665544.

The law was enacted to deter late payments in commercial transactions and to provide businesses with a legal remedy if payments are delayed. It gives creditors the right to charge interest on overdue payments, along with a fixed sum and reasonable recovery costs in some cases.The Act applies to commercial transactions—those between businesses or between public authorities and businesses—for the supply of goods and services.

Over the years, amendments, including those introduced by the Late Payment of Commercial Debts Regulations 2002, have added significant strength to the Act.

Key Provisions of the Act

• Statutory Interest
  • A creditor can charge interest at 8% above the Bank of England base rate on overdue payments.
  • This is a default rate that applies unless the contract specifically outlines another "substantial remedy."
  • Interest begins to accrue from the day after the payment becomes overdue.
• Fixed Compensation can be claimed for Debt Recovery
  •  £40 for debts under £1,000
  • £70 for debts between £1,000 and £10,000
  • £100 for debts over £10,000
• Additional Recovery Costs
  • If the reasonable costs of recovering the debt exceed the fixed sum, creditors can claim the extra amount—particularly useful for legal and administrative expenses.
• Timeframes for Payment
  • The standard payment period is 30 days from either the date of invoice or receipt of goods/services (whichever is later), unless otherwise agreed in the contract.
  • Contracts cannot extend the payment period beyond 60 days unless it is not "grossly unfair" to the supplier.

Benefits of the Act

Improved Cash Flow

For most SMEs, cash flow is often more critical than profitability in the short term. The Act acts as a strong incentive for customers to pay promptly, helping suppliers maintain a steady flow of working capital.

Legal Clarity and Fairness

The Act provides a clear legal right to claim interest and compensation without needing to go through sometimes complex contractual litigation. It brings a fairer balance to commercial relationships, especially when smaller businesses deal with larger corporations or public bodies.

Deterrent Against Late Payment

Knowing that overdue invoices will attract a relatively high rate of interest (8% + base rate), encourages many debtors to prioritise timely payment. This reduces the number of late payers overall and increases financial discipline.

No Need to Include in the Contract

One of the unique advantages of the Act is that it applies automatically—even if the contract is silent about late payment. This offers a safety net for suppliers who may not have included interest terms in their agreements – as they may not want to jeopardise a new working relationship at the outset.

Compensation for Effort

Beyond interest, the Act allows creditors to receive fixed compensation and, if necessary, additional reasonable costs. This ensures businesses don’t suffer financial loss simply from the act of chasing payments. You do not have to impose the compensation – but they could be a useful bargaining chip to secure payment, whilst still retaining client goodwill, (if that is your most desirable outcome).

Supportive Legal Precedent

Over the years, case law has reaffirmed and strengthened the rights conferred by the Act. English courts tend to uphold these statutory entitlements robustly, offering businesses legal confidence.
 

Availability and Application in England

The Act applies throughout England & Wales to any commercial debt arising under a contract for the supply of goods or services, provided both parties are businesses.

Who Can Use the Act?

All Suppliers, Contractors and Subcontractors, Service Providers, Manufacturers and Wholesalers can take advantage, whilst  all Public Authorities, have been made subject to the Act. Historically such public authorities were notoriously slow to pay on time, prompting the government to bring the law into force to encourage prompt payment practices.

Disputes and Enforcement

If a business chooses to enforce its rights under the Act, it can include interest and compensation in a formal debt recovery letter, also known as a "Letter Before Action." If payment is not made, the business can pursue the debt through the county court.

Exclusions
•    The Act does not apply to consumer transactions.
•    Some contracts between entities from outside the UK may fall outside its jurisdiction, unless the governing law of the contract is English law.

Practical Considerations for Businesses

To enhance your prospects of making a full recovery of the debt, together with interest, compensation and the reasonable costs of recovery we would advise you to : 
1.    Keep Accurate Records Ensure all invoices are dated, include payment terms, and are sent promptly. 
2.    Include Reference to the Act Even though not required, stating in your terms that you will charge interest under the Late Payment Act can deter delays.
3.    Chase Payments Promptly The sooner you act, the more likely you are to recover what’s owed.
4.    Use our Professional Debt Collection Services as we are familiar with the Act and can streamline recovery, adding pressure on the debtor.
 

Conclusion

The Late Payment of Commercial Debts (Interest) Act 1998 remains a powerful and accessible tool for businesses facing delayed payments. It imposes statutory interest, fixed compensation, and reasonable recovery costs giving your businesses a structured and fair method to deal with late-paying customers—often without the need for formal litigation.

Contact Us

If you  wish to discuss any of the issues raised or seek payment of any outstanding debts,  Shoghig Moskofian  or our  Litigation Disputes Team  are on hand to support you. Please contact your local Kingsfords office in Ashford, Cranbrook or Hythe. Alternatively, you can click on the “Get in Touch” icon on the right hand side of our Website to send an enquiry and a member of our team will get back to you promptly. You can also call us directly on 01233 665544,  where we will be happy to discuss your concerns without obligation