Avoid cash flow problems – set clear Credit Terms from day one

Late payment is one of the most common causes of financial stress for businesses. A company can be profitable on paper but still struggle if cash is not arriving in time to meet wages, rent and supplier invoices. For many firms, the difference between stability and insolvency lies in how effectively they manage credit. The first step is ensuring that payment terms are set out clearly from the very start.

Why credit terms matter

Credit is, in effect, an interest-free loan that businesses extend to their customers. By supplying goods or services and agreeing to be paid later, a company is exposing itself to risk. Unless the terms are carefully drafted and properly communicated, disputes over when and how payment is due can arise, damaging relationships and delaying cashflow.

Unclear or poorly worded terms can also limit the legal options available if payment is not made.

Courts will usually expect written evidence of the agreement. Where the terms are vague, the process of enforcing payment can become more complicated and expensive.

What good payment terms should include

Well-drafted credit terms should leave little room for misunderstanding. At a minimum, they should cover:

• Payment period – the number of days within which invoices must be settled. Thirty days is common, but businesses may shorten or extend this depending on their sector and cashflow needs.
• Invoice requirements – details of how and when invoices will be issued, and what information they must contain.
• Interest on late payments – the statutory right to charge interest exists under the Late Payment of Commercial Debts (Interest) Act 1998, but it is wise to set this out expressly. Some businesses prefer to specify a contractual rate instead.
• Consequences of non-payment – including suspension of supply, recovery of goods, or recovery of costs associated with debt collection.
• Dispute resolution procedures – a mechanism for raising and addressing queries about invoices can prevent small issues from escalating.

The more precise the wording, the easier it is to enforce. For example, specifying that interest will accrue “at 8% above the Bank of England base rate, calculated daily” leaves little scope for argument.

The legal framework

UK businesses are supported by legislation designed to tackle late payment. The Late Payment of Commercial Debts Regulations give suppliers the right to claim statutory interest and reasonable recovery costs when payment is late. However, relying on these rights after a problem has arisen is often less effective than preventing the problem in the first place.

Clear credit terms, communicated before work begins, can establish a contractual right to interest or recovery costs on more favourable terms than the statutory minimum. They also provide a stronger basis for court action if it becomes necessary.

Communicating terms effectively

Even the best-drafted terms will achieve little if they are not properly incorporated into the contract with the customer. Businesses should:

• Ensure the terms are provided before any agreement is made. Adding them to the back of an invoice issued after delivery may be too late.
• Require written confirmation that the customer accepts the terms, particularly for larger contracts.
• Keep records of all communications, so there is evidence of what was agreed if a dispute arises.

Many businesses include their terms on order forms, quotes, or as part of a standard terms and conditions document. Online transactions should require customers to tick a box confirming acceptance before placing an order.

Tailoring terms to the sector

Different industries have different expectations. For example, in construction, 60 or 90-day terms are not unusual, whereas small service providers may insist on payment within 14 days. Exporters may need to consider international rules on payment methods and dispute resolution.

While it can be tempting to offer longer terms to secure new customers, doing so can expose the business to unnecessary risk. Legal advice may be needed to strike the right balance between commercial flexibility and financial protection.

Enforcing payment when terms are breached

Having clear terms in place provides a stronger platform for enforcement. Businesses can rely on their contractual rights to:

• Charge interest automatically when payment is late.
• Recover goods supplied under a retention of title clause.
• Pass the debt to a collection agency or solicitors without delay.
• Initiate court proceedings with clear evidence of the agreed terms.

Without such provisions, recovering overdue sums can become protracted and uncertain, increasing the risk of bad debt.

The link to insolvency risk

For many companies, insolvency is not the result of unprofitability but of cashflow shortages caused by late or non-payment. When customers do not pay on time, suppliers in turn may struggle to pay their own creditors, creating a chain reaction of financial distress.

By setting clear credit terms from day one, businesses reduce the likelihood of disputes, improve recovery rates and protect their cash position. For directors, this is not only good practice but also part of their duty to act responsibly and safeguard the company’s solvency.

Credit terms may not be the most glamorous aspect of running a business, but they are among the most important. Clear, enforceable payment provisions, agreed in advance and applied consistently, can prevent disputes and strengthen a company’s financial resilience.

In times of economic uncertainty, when insolvency risk is heightened, these measures are a vital line of defence. Businesses that take the time to get their credit control processes right from the outset are far better placed to weather financial challenges and maintain stability.

If you would like help with credit control, debt collection or insolvency issues please contact Lewis on 01228 516666 or click here to send him an email.