A well-crafted payment terms policy is more than just admin—it’s your first line of defence against late payments and poor cash flow. For UK SMEs, setting clear expectations around when and how clients pay can dramatically reduce disputes, improve financial stability, and enhance business professionalism.
In this article, we’ll outline step-by-step guidance to help you create a payment terms policy that is enforceable, client-friendly, and cash flow-positive.
1. Understand Why Payment Terms Matter
Your payment terms act as a contractual agreement between you and your client. Without them, you risk:
Unpredictable income
Cash flow gaps
Costly disputes
Client relationship strain
A clear payment policy tells clients exactly what you expect—and what will happen if they don’t comply.
🔗 Learn how this links to broader financial stability in Effective Strategies for Ensuring Clients Pay On Time
2. Define Your Standard Payment Terms
In the UK, the default legal payment term is 30 days, but you are free to set your own.
📌 Key elements to include:
Invoice Due Date: (e.g. “Payment due within 14 days of invoice date”)
Accepted Payment Methods: (e.g. BACS, card, PayPal)
Bank Details & Reference Format
Late Payment Penalties (e.g. 8% + Bank of England base rate) under the Late Payment of Commercial Debts (Interest) Act 1998
🔗 For full guidance on payment terms law, visit GOV.UK
3. Tailor Terms Based on Client Risk
Not all clients are equal. Use credit checks and payment history to determine how strict your terms should be.
✅ For new or high-risk clients:
Request deposits or full pre-payment
Set shorter payment windows (e.g. 7 or 14 days)
Consider using trade references or a platform like Will They Pay
✅ For loyal, low-risk clients:
Offer more flexible terms or early payment discounts
🔗 Read: Assessing Client Reliability: Credit Checks and Beyond
4. Make Your Policy Clear and Visible
Ensure your payment terms are:
Included in contracts and proposals
Printed clearly on every invoice
Sent to clients at onboarding
Available on your website
Use plain English. For example:
“Payment is due within 14 days. A 5% late fee may be applied after this date.”
Clarity reduces excuses and increases compliance.
5. Automate Enforcement with Software
Using digital tools can help enforce your terms without the awkwardness of manual chasing.
💻 Platforms like Xero, QuickBooks, and GoCardless allow you to:
Set automated invoice reminders
Schedule recurring payments
Flag overdue accounts in real time
🔗 Explore more tips in: Streamlining Invoice Management: Tips for Efficiency
6. Introduce a Formal Late Payment Policy
A well-communicated late payment policy deters poor payment behaviour.
Include:
Interest rates on overdue invoices (as permitted by UK law)
Administrative fees for debt recovery
Your right to pursue legal action or engage collection agencies
This doesn’t mean being aggressive—but being clear and consistent.
🧑⚖️ Refer to Business Debtline for ethical debt collection guidance.
7. Educate Your Clients Proactively
Before problems arise, take time to educate your clients:
Walk them through the payment process during onboarding
Share FAQs or guides
Provide clear contacts for billing queries
A well-informed client is less likely to delay payment unintentionally.
🔗 Also read: Creating a Positive Payment Experience for Your Clients
Conclusion: A Policy That Supports Cash Flow and Builds Trust
A strong payment terms policy:
✅ Promotes on-time payments
✅ Reduces risk of disputes
✅ Supports reliable cash flow
✅ Demonstrates professionalism and fairness
By combining legal compliance, clarity, and automation, your policy becomes more than just a clause—it becomes a tool for business growth, trust, and resilience.
Additional Resources:
Will They Pay – Business Payment Review Platform
GOV.UK: Guide to Payment Terms & Late Fees
