Are Your Payment Terms Actually Protecting Your Business?

Your invoices specify payment within 30 days; the work is complete, but payment remains outstanding.

Why?

Finance managers and credit controllers often treat payment terms as routine, but regular review is essential to ensure these terms protect your business effectively. With changes to UK late-payment legislation underway, now is the time to ensure your payment arrangements are clear, commercially appropriate, and supported by an effective recovery process.

What should your payment terms achieve?

Payment terms should do more than specify a due date. They should create clarity between you and your customers, reduce misunderstandings, and provide a clear basis for action if payment is not received.

A well-structured agreement should address:

• Payment deadlines: When payment becomes due and, if needed, how that date is calculated.
• Payment methods: How the customer is expected to settle the invoice.
• Invoice disputes: How queries should be raised and who is responsible for resolving them.
• Late-payment consequences: Whether interest and recovery costs may apply.
• Credit limits: The maximum outstanding balance you are prepared to allow.
• Non-payment: What action may follow if agreed terms are not met.

These terms must be communicated and agreed before supplying goods or services. Adding terms to an invoice after work is complete may not make them legally enforceable.

What does UK law currently say about payment terms?

Under the Late Payment of Commercial Debts (Interest) Act 1998 and subsequent amendments, businesses have statutory protections when qualifying commercial invoices are paid late. For business-to-business transactions, payment terms are expected to be no longer than 60 days unless a longer period has been expressly agreed and is not grossly unfair to the supplier. Public authorities generally must pay within 30 days.

Where no payment date has been agreed, statutory rules determine when payment becomes late, generally 30 days after receipt of the invoice or delivery of the goods or services, whichever is later. For qualifying overdue commercial debts, businesses may be entitled to charge statutory interest at 8% above the Bank of England base rate.

Fixed compensation may also be available:

• £40 for debts below £1,000
• £70 for debts from £1,000 to £9,999.99
• £100 for debts of £10,000 or more

Additional reasonable recovery costs may also be recoverable where the statutory conditions are satisfied.

However, contractual terms can affect the entitlement to statutory interest, particularly where an alternative substantial contractual remedy has been agreed. Finance teams must understand legal rights and exactly what has been agreed with customers.

The Commercial Payments Bill: What could change?

The UK Government introduced the Commercial Payments Bill in May 2026 as part of its efforts to tackle persistent late payment. The Bill passed the House of Lords in October 2026 and has moved to the House of Commons for further consideration.

Its proposals include:

• A maximum payment period of 60 days for qualifying business transactions, subject to limited exemptions.
• Mandatory statutory interest on late commercial payments.
• Stronger provisions addressing late or inadequately explained invoice disputes.
• Greater investigative and enforcement powers for the Small Business Commissioner.
• Additional reporting and accountability requirements for larger businesses with poor payment practices.

Late payments are estimated to cost the UK economy £11 billion each year and contribute to the closure of dozens of businesses daily. These proposals are not yet law, and the final requirements and implementation dates remain subject to the parliamentary process. They indicate the future direction of government policy. Reviewing your payment terms now can help identify weaknesses before new legislation comes into effect.

Five weaknesses that could be undermining your payment terms

1. Your customers have not clearly agreed to them

Customers may receive your terms but not explicitly accept them. Verbal agreements or customer-imposed terms can create confusion. This uncertainty becomes a problem if payment is disputed.

Practical action: Review how you incorporate your terms into customer agreements. Record acceptance and resolve conflicting contractual terms before supplying goods or services.

2. Your payment deadlines are open to interpretation

Consider the difference between:

“Payment within 30 days.”

And:

“Payment due 30 calendar days from the invoice date.”

The second statement is clearer. Ambiguity can create unnecessary discussions about when payment was expected. Similarly, terms such as “payment following approval” may cause problems if the approval process is not defined.

Practical action: Specify the payment period, the event that starts it and any agreed approval requirements.

3. Invoice queries are not being identified early enough

An invoice might remain outstanding for several weeks before the customer says the purchase order number is incorrect or disagrees with part of the charge. By then, you may have lost valuable time. Although payment terms cannot eliminate genuine disputes, clear processes can help identify and resolve them sooner.

Practical action: Ask customers to raise invoice queries promptly, set up a named contact to resolve them, and record when you received and addressed each query. For genuine disputes, assess carefully before charging interest or escalating recovery.

4. Your terms mention consequences, but nobody follows through

Your contract may explain that interest can be charged on overdue balances or that recovery action may follow continued non-payment.

But what happens in practice? If invoices remain unpaid despite reminders, your contractual provisions lose effectiveness. The issue may not be the wording of your terms. It may be the lack of a clear escalation process.

Practical action: Establish internal procedures that specify when you issue reminders, review accounts, and consider external recovery.

5. Your credit terms do not reflect the customer’s payment risk

Not every customer presents the same level of risk. A new customer with limited trading history may not warrant the same credit arrangements as an established customer with a consistent payment record. Similarly, a customer whose outstanding balance has increased substantially may need their credit limit reviewed.

Practical Action: Regularly review credit limits, payment history, and overdue balances. For higher-risk accounts, consider shorter payment terms, deposits, or staged payments.

Five questions for your finance team

As the year ends, December is an ideal time to review whether your credit control procedures and payment terms are working effectively together.

Before the new year, ask:

1. Are our standard payment terms clearly agreed before work begins?
2. Are customers regularly exceeding their agreed payment periods?
3. Are invoice disputes being raised and resolved promptly?
4. Do we have clear escalation procedures for overdue accounts?
5. Are we reviewing customer credit limits and payment behaviour frequently enough?

If you identify recurring problems, reviewing your terms and procedures now can reduce overdue balances next year.

Strong payment terms need an effective recovery process.

Clear payment terms are essential, but only one part of effective credit control.

Support your payment terms with accurate invoicing, consistent follow-up, thorough documentation, and prompt action on persistent non-payment. Improving future payment terms will not recover money that is already overdue. 

At My Debt Recovery, we recover unpaid commercial invoices through professional negotiation and, where appropriate, escalation. If customers are ignoring agreed terms or your finance team spends too much time chasing overdue balances, consider professional debt recovery support.