Research suggests that as many as 60% of Scottish SME invoices are paid late, costing the economy billions of pounds each year and placing considerable strain on those organisations awaiting payment.

While most commercial relationships operate smoothly, delayed payments can create serious cash flow difficulties, particularly for small and medium-sized businesses that rely on prompt settlement of invoices to meet ongoing costs.

The importance of clear contracts

One of the most effective ways to reduce the risk of commercial debt disputes is to ensure that business arrangements are properly documented from the outset.

A written contract provides clarity about the goods or services being supplied, payment terms, deadlines and the consequences of non-payment. It also creates a clear legal framework that can be relied upon if a dispute arises.

Businesses should consider including provisions covering:

• Payment due dates
• Interest on late payments
• Administrative charges for overdue accounts
• Recovery of legal and enforcement costs
• Rights to suspend services or recover goods where appropriate

Clear contractual terms can often prevent disputes before they arise and strengthen a business's position if commercial debt recovery becomes necessary.

Interest on late payments

Where a commercial customer fails to pay on time, businesses may be able to rely on the Late Payment of Commercial Debts (Interest) Act 1998.

The legislation provides a statutory framework allowing businesses to claim interest and compensation on overdue commercial debts.

Under the Act, creditors can claim statutory interest on overdue payments at a rate of 8% above the Bank of England base rate.

Interest begins to accrue:

• From the payment date specified in the contract, or
• If no payment date is agreed, 30 days after delivery or acceptance of the goods or services, or receipt of the invoice.

The interest is calculated on a simple rather than compound basis. This means that interest is applied only to the outstanding debt itself and does not accumulate on previously charged interest.

Compensation for late payment

In addition to statutory interest, businesses can claim a fixed compensation payment based on the size of the debt:

• £40 for debts under £1,000
• £70 for debts between £1,000 and £10,000
• £100 for debts over £10,000

Creditors may also be entitled to recover reasonable costs incurred in pursuing payment where those costs exceed the fixed compensation amount.

These rights are designed to discourage late payment and provide a degree of protection for businesses that are left out of pocket by overdue commercial invoices.

Proposed changes to late payment legislation

The UK Government has proposed a number of reforms aimed at strengthening protections against late payment.

Proposals under consideration include:

• Mandatory application of statutory interest on overdue debts
• A maximum payment term of 60 days in commercial contracts
• Measures to prevent businesses from creating artificial disputes to delay payment

While these proposals have not yet been fully implemented, they reflect an increasing focus on improving payment practices across the business community. 

Recovering commercial debts

Although the legislation provides valuable rights, it does not remove the need to take enforcement action where payment is not forthcoming.

Businesses may still need to pursue outstanding debts through:

• Formal payment demands
• Solicitors' letters
• Court proceedings
• Insolvency procedures, where appropriate

Preventing late payment problems

While legal remedies are available, the most effective approach is to minimise the risk of late payment before problems arise.

Businesses should consider conducting credit checks on new customers, using clear written contracts, issuing invoices promptly, and requesting deposits or advance payments where appropriate. Regular monitoring of outstanding accounts and early action when payments become overdue can also help prevent larger problems developing.

Late payments of commercial debts can place significant pressure on any business and, in some cases, threaten its financial stability. The law provides important protections through statutory interest, compensation and enforcement options, but these remedies are generally a last resort.

The best approach is to avoid payment disputes wherever possible through clear contracts, robust payment terms and proactive credit control procedures. However, if a customer or contractor fails to pay what is owed, seeking legal advice at an early stage can help protect your position and improve the prospects of recovering outstanding monies.

We’ll update this post as and when the legislation is passed and implemented - likely changes will come into force in 2027.