TL;DR
- Set 14–30 day payment terms in writing before work begins. Require 30–50% deposits on project work14–30 days
- Under the Late Payment Act, you can charge 8% + base rate interest plus £40–£100 fixed compensation on overdue B2B invoices8%+ interest
- Target debtor days of 30–35. Reducing by 10 days on £1m revenue frees ~£27k in cash30–35 days
- Follow a structured chasing process: 7 days (email), 14 days (phone), 30 days (formal demand), 60 days (legal)7–60 day process
💡Quick reference summary. Continue reading for comprehensive analysis and context.
Late-paying clients are the number one cash flow problem for UK agencies. You deliver the work, issue the invoice, and then wait. And wait. Meanwhile your staff wages, software subscriptions, and office rent come out on time every month regardless.
This guide gives you a complete framework for getting paid on time: from setting the right payment terms, to knowing your legal rights, to the step-by-step chasing process that actually works. Every recommendation comes from what we see working across the agencies we advise.
Why Agencies Get Hit Harder by Late Payments
Agencies are uniquely vulnerable to late payments because of how the business model works. You incur costs (staff time, contractor payments, media spend) weeks or months before you invoice, and then wait 30–60 days for payment. That creates a cash gap that can be three months or more between spending the money and receiving it.
Add to this the fact that most agencies have high fixed costs (salaries are typically 55–65% of revenue) and relatively thin margins (15–25% EBITDA for a well-run agency), and late payments become an existential risk rather than just an inconvenience.
- Work is delivered before invoicing, creating a natural cash gap
- High fixed costs (salaries) cannot be delayed when income is delayed
- Client concentration risk: one large client paying late can destabilise the whole business
- Power imbalance: agencies often feel unable to push back on larger clients
- Media passthrough creates additional cash flow pressure when agencies front ad spend
Setting Payment Terms That Protect You
Your payment terms should be set, agreed, and documented before any work begins. Include them in your proposal, engagement letter, or MSA. Do not assume the client will accept your standard terms — discuss them explicitly.
| Agency Size | Recommended Terms | Deposit |
|---|---|---|
| Freelancer / solo | 14 days or payment on delivery | 50% upfront for projects |
| Small agency (2–10 people) | 14–30 days | 30–50% upfront for projects |
| Medium agency (10–30 people) | 30 days | 25–30% upfront; retainers paid in advance |
| Large agency (30+ people) | 30 days (resist 60+ days) | Project milestones; media spend upfront |
Never accept 60+ day terms without compensation
If a client demands 60 or 90 day payment terms, build the financing cost into your pricing. At a 5% cost of capital, 60 extra days costs you approximately 0.8% of the invoice value. On a £100,000 annual retainer, that is £800 in hidden financing cost. Either price it in or negotiate shorter terms.
Your Legal Rights: The Late Payment Act
The Late Payment of Commercial Debts (Interest) Act 1998 gives you powerful rights that many agency owners do not know about. These rights apply automatically to all B2B transactions — you do not need to include them in your contract.
- Statutory interest: 8% per year above the Bank of England base rate (currently 4.5%, so total 12.5%) on any overdue B2B invoice
- Fixed compensation: £40 for debts under £1,000, £70 for debts £1,000–£9,999, £100 for debts of £10,000 or more
- Reasonable recovery costs: you can also claim reasonable costs of chasing the debt (solicitor letters, etc.)
You do not need to have agreed these terms in advance. They are statutory rights. However, mentioning them in your terms and conditions signals to clients that you take payment seriously and may discourage late payment.
In practice, most agencies use the threat of statutory interest as a negotiating tool rather than actually charging it. Simply referencing the Act in a chasing email often accelerates payment.
The 30-60-90 Chasing Framework
A structured chasing process removes emotion from debt collection and ensures nothing falls through the cracks. Here is the framework we recommend to our agency clients.
Invoice issued
Send immediately on completion or on the agreed billing date. Do not wait until month-end unless your contract specifies it. Include payment terms, bank details, and a clear due date on every invoice.
Pre-due reminder
Send a friendly automated reminder 3 days before the due date. Xero and QuickBooks both support this. Frame it as helpful: "Just a reminder that invoice #1234 is due on Friday."
First follow-up
Email your day-to-day contact. Keep it friendly and factual: "I noticed invoice #1234 is now 7 days overdue. Is there anything you need from our side to process payment?"
Phone call
Call the person responsible for approving invoices. Email is easy to ignore; phone calls are not. If there is a dispute, this is where you find out. Resolve it quickly and resend if needed.
Formal demand
Send a formal email to the finance contact and your main client contact, referencing the Late Payment Act and your right to charge statutory interest. Set a clear deadline (7 days) for payment.
Senior escalation
Escalate to the most senior person you have a relationship with at the client. This often unblocks payment that is stuck in an internal process. Be professional but direct.
Pause work and Letter Before Action
If you have a right-to-pause clause, exercise it. Send a formal Letter Before Action (LBA) giving 14 days to pay before legal proceedings. An LBA from a solicitor costs £100–£300 and resolves most cases.
Legal action or write-off
For debts under £10,000, the Small Claims Court is straightforward and costs £35–£455. For larger debts, consider a solicitor or debt collection agency. If recovery is unlikely, write off the debt (it is Corporation Tax deductible).
When to Stop Work or Write Off a Debt
The hardest decision is knowing when to stop investing time in a non-paying client. Here are the signals that it is time to pause or terminate:
- Consistent pattern: the client pays late on every invoice, not just occasionally
- No communication: they are not responding to chasing emails or calls
- Dispute without resolution: they raise vague objections but never formalise or resolve them
- Financial distress signals: you hear about redundancies, office closures, or other clients not being paid
Bad debts are tax-deductible if you can demonstrate they are genuinely irrecoverable. Keep records of your chasing efforts as evidence. Write off the debt in your accounts and claim the Corporation Tax relief.
Debtor Days: The Metric You Should Track Monthly
Debtor days measures how long, on average, it takes your clients to pay you. It is the single most important cash flow metric for agencies.
The formula: (trade debtors ÷ annual revenue) × 365
| Debtor Days | Assessment | Action |
|---|---|---|
| Under 25 | Excellent | Maintain current processes |
| 25–35 | Good | Minor improvements possible |
| 35–45 | Needs attention | Review chasing process and payment terms |
| 45+ | Problem | Systemic issues: terms, chasing, or client quality |
For a £1m revenue agency, every 10-day reduction in debtor days frees approximately £27,000 in cash. That is real money that can cover a month of contractor costs or fund a new hire without needing an overdraft.
Cash Flow Forecasting: See Problems Before They Hit
The best way to manage late payments is to anticipate their impact before they cause a crisis. A rolling 13-week cash flow forecast gives you visibility of when cash will be tight and time to act.
- Map all expected income by week, using realistic collection dates (not invoice due dates)
- Map all committed expenditure: salaries, rent, software, contractor payments
- Identify weeks where the balance dips below your comfort threshold (ideally 2 months of fixed costs)
- Update weekly — a forecast is only useful if it reflects current reality
Xero's built-in cash flow projection gives a basic view. For more detailed forecasting, tools like Float or Fluidly integrate with Xero and provide scenario modelling. Read our forecasting framework guide for a step-by-step approach.
Contractual Protections Every Agency Should Have
Your contract is your first line of defence. These clauses should be in every agency engagement agreement:
Clear payment terms
State the payment period (e.g. 30 days from invoice date), accepted payment methods, and the consequences of late payment. Reference the Late Payment Act explicitly.
Right to pause or suspend work
Include a clause allowing you to pause all work if any invoice is overdue by more than 14 or 30 days. This gives you leverage without terminating the relationship.
Intellectual property retention
State that IP and deliverables remain your property until all invoices are paid in full. This is particularly important for agencies delivering creative assets, websites, or code.
Media spend terms
If you front media spend for clients, require prepayment or immediate reimbursement. Do not let media passthrough become an interest-free loan to your client.
Kill fee / termination clause
Include a minimum notice period and a kill fee for early project termination. This protects you from clients who cancel mid-project after you have allocated resources.
Frequently Asked Questions
What are standard payment terms for UK agencies?
Most UK agencies use 30-day payment terms. Smaller agencies increasingly use 14-day terms. For project work, require 30–50% deposits before starting. For retainers, billing in advance (first of the month) is increasingly common and protects your cash flow.
Can I charge interest on late invoices?
Yes. Under the Late Payment of Commercial Debts Act 1998, you can charge statutory interest at 8% above the Bank of England base rate on overdue B2B invoices. You can also claim fixed compensation (£40–£100 depending on debt size). These rights apply automatically.
What is a good debtor days number?
Target 30–35 debtor days. The UK average is around 40 days. Well-managed agencies achieve 25–30 days. If your debtor days exceed 45, review your payment terms, chasing process, and client mix.
When should I stop work for a non-paying client?
Consider pausing work when an invoice is 30+ days overdue and the client is not communicating. Having a contractual right-to-pause clause makes this smoother. Always communicate your intention in writing before pausing.
Should I require deposits from clients?
Yes, especially for project work. A 30–50% deposit is standard in the creative industry. For new clients, a deposit qualifies their commitment and reduces your financial exposure.
How do I calculate debtor days?
Debtor days = (trade debtors ÷ annual revenue) × 365. Track this monthly in your management accounts. Most accounting software (Xero, QuickBooks) can report this automatically.
When should I write off a bad debt?
When recovery costs exceed the likely return — typically debts over 180 days with no client communication. Send a Letter Before Action first, consider Small Claims Court for debts under £10,000, then write off and claim the Corporation Tax deduction.
Can I use a debt collection agency?
Yes. Debt collection agencies typically charge 5–15% of the recovered amount, or a fixed fee for smaller debts. They are most effective for debts over £1,000 where the debtor is not in financial distress. For smaller amounts, the Small Claims Court is often more cost-effective.
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