What Are Payment Terms (and Why Do They Matter Legally)?
Payment terms define when and how invoices must be paid. Getting them right — and enforcing them — is one of the most important legal and commercial disciplines for any SME.
Key Takeaways
- Payment terms should be agreed in writing before work begins, not added to an invoice after the fact.
- The default payment period under UK law (where nothing is agreed) is 30 days.
- Large businesses are legally required to pay SMEs within 30 days under the Public Contracts Regulations.
- Interest and compensation are legally available for late payment — but you must know how to claim them.
What payment terms are and why they matter
Payment terms are the conditions under which a buyer agrees to pay a seller — specifically, when payment is due, in what currency, by what method, and what happens if payment is late. For SMEs, payment terms are a critical cash flow management tool: a business that invoices promptly on 14-day terms and enforces them rigorously will have fundamentally better cash flow than one that invoices on 60-day terms and allows those to slip. Payment terms should be agreed in your contract or terms of business before work begins. Adding payment terms only to the invoice — rather than to the underlying contract — can create disputes about whether those terms were incorporated into the agreement at all.
Standard UK payment terms and the legal default
Common payment terms in the UK are 14 days, 30 days, and 60 days from the invoice date (or from the date of delivery of goods or services, depending on how the contract is worded). Where a commercial contract between businesses does not specify a payment period, the Late Payment of Commercial Debts (Interest) Act 1998 sets a default payment period of 30 days. Public authorities are legally required to pay suppliers within 30 days under the Public Contracts Regulations 2015. Some large corporates attempt to impose 60-day or even 90-day payment terms on smaller suppliers — these are permitted by law (though the government operates a voluntary prompt payment code), but businesses with more than 250 employees are required to publish their payment practices biannually.
Structuring terms to protect your cash flow
There are several practical ways to structure payment terms to reduce cash flow risk. Requiring a deposit (typically 25–50% of the project value) before work commences is standard practice in many service sectors and reduces your exposure if a client delays payment or becomes insolvent during a project. Milestone payments — where payment is tied to defined stages of delivery rather than a single invoice on completion — spread cash flow risk through a project. Retention clauses, where a percentage of the fee is held back until a defined post-delivery period, are common in construction but should be resisted by service businesses where there is no ongoing defects liability. Including a retention of title clause in contracts for goods sale means the goods remain your property until paid for.
Enforcing payment terms
If a client does not pay within the agreed payment period, UK law gives you several tools. You are entitled to charge statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998 at 8% above the Bank of England base rate, plus a fixed compensation amount (£40 for debts below £1,000, £70 for debts between £1,000 and £9,999, and £100 for debts above £10,000). You must state in your contract or standard terms that you intend to exercise these rights. For unpaid debts, a letter before action followed by a County Court claim is a straightforward process for amounts under £100,000. Statutory demand and winding-up petitions are available for larger debts but should only be used where the debt is undisputed and the debtor is solvent.