Late payments can pose a serious threat to cash flow and business stability for small businesses – that’s why the Office of the Small Business Commissioner published a new Fair Payment Code (FPC) this year governing the payment of invoices. Replacing the Prompt Payment Code, the FPC introduces a three tier awards system for businesses – Gold, Silver and Bronze – based on how promptly they pay invoices. The Code aims to drive best practice, encourage timely payments, and foster a culture of fairness and collaboration in business transactions.
Of course, late payments from clients can be unavoidable – particularly when they are faced with disruptions outside their control, such as the recent cyberattacks or erratic government policies. As a business owner, it can be difficult to weigh up your next move when looking to recover a late payment. While your business needs prompt payment, you may also want to preserve a good relationship with an embattled client sogetting legal immediately may not be the best option. Use our Debt collection toolkit and have a look at our step-by-step guide on how to sensibly escalate a late payment before going to court.
1. Make immediate contact
The first step is to get in touch with your debtor as soon as a payment is overdue. Contact should be professional, polite, and firm:
i. Ask why the payment is delayed and try to agree on a revised deadline.
ii. Follow up any phone calls with an email or letter summarising what was discussed.
iii. Keep a written record of all correspondence in case the issue escalates.
Establishing open communication early can often resolve misunderstandings and prompt late payment recovery without further action. See our Q&A here, for more.
2. Send chasing letters
If the debt remains unpaid, escalate your recovery efforts using a structured approach:
i. 5 days late: Send a First Letter Chasing Payment.
ii. 15 days late: Send a Second Letter Chasing Payment, mentioning that interest or late payment charges may apply.
iii. 30 days late: Send a Final Letter Chasing Payment, warning that debt recovery costs may now be incurred and that formal steps could follow.
You can find our template letters and debt collection timeline in our Debt Collection Toolkit, a valuable resource for businesses aiming to recover debts efficiently.
3. Consider alternative debt recovery options
If the above steps don’t yield results, you still have several non-court options:
4. Use a debt collection agency
Instructing a reputable debt collection agency can be a practical solution if your relationship with the client has already deteriorated. Debt collectors will pursue repayment and assess whether the debtor can pay, often working on a ‘no collection, no fee’ basis
However:
i. Choose your agency carefully to avoid reputational or legal risks.
ii. Make sure your data protection obligations are met when sharing debtor details.
5. Consider instalment payments
You may opt to accept instalments if your debtor offers them, especially if recovering the full amount at once seems unlikely. However, do so cautiously:
i. Always document the agreement clearly.
ii. Specify that it’s a one-time concession and does not set a precedent for future debts.
6. Use Alternative Dispute Resolution (ADR)
ADR methods, such as mediation, can resolve disputes without court involvement. ADR is especially useful where:
i. you wish to preserve the business relationship; or
ii. the debtor is a larger firm or is part of a regulated trade association
7. Send a statutory demand
A statutory demand is a formal notice demanding payment and can be an effective tool in showing you are serious about debt recovery. It is the first step in bringing court proceedings for insolvency, although you can choose whether to follow it up with court action. It’s particularly suitable if:
i. the debt is large enough (£5,000 for individuals, £750 for companies); and
ii. the debt is undisputed.
Statutory demands should be used carefully, especially where the debtor may challenge the debt’s validity, as a successful challenge can result in legal cost liabilities for you. For more on statutory demands, see our Q&A here.
Consider selling the debt
If cash flow is a priority and recovery appears unlikely, you might consider selling the debt.
This involves:
i. Assigning the debt to a third party for a discounted amount (often 10–30% of face value).
ii. Ensuring contractual rights allow for assignment.
iii. Complying with data protection laws during the transfer process.
Selling the debt is usually a last resort, but it relieves you from further recovery efforts.
Key Takeaways
Avoiding court does not mean avoiding action. On the contrary, structured, timely, and well-documented debt recovery efforts can be just as effective, and often more cost-efficient. Your action plan should ideally follow this path:
i. engage early and professionally;
ii. send structured chaser letters escalating the tone;
iii. explore resolution options like ADR or debt agencies;
iv. use statutory demands where appropriate; and
v. consider selling the debt if recovery proves too resource-intensive.
Have a look at our detailed guidance on late payments and Debt Collection Toolkit for more comprehensive coverage of how to chase debts coupled with all the documentation you need to do so, plus guidance on whether you can charge interest on debts and how to initiate court proceedings if necessary.
The content in this article is up to date at the date of publishing. The information provided is intended only for information purposes, and is not for the purpose of providing legal advice. Sparqa Legal’s Terms of Use apply.
Rahul joined Sparqa in 2025 from the Commercial Court, where he served as a Judicial Assistant. He has active interests in commercial, corporate and employment developments which he pursues alongside teaching undergraduate law.