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Late payments and poor payment practices are a threat to many small businesses. In the UK, 37% of small businesses have run into cash flow difficulties due to late payments, with average unpaid invoices totalling around £21,000 per business. This ongoing issue not only squeezes cash flow but also contributes to the closure of 38 businesses a day.
But it doesn’t have to be that way. Good payment habits can make a big difference. They help keep cash flow steady, improve your credit score, and strengthen your reputation with suppliers and lenders. During tough times, suppliers often prioritise businesses that have a track record of paying on time.
In this article, we share practical payment habits to help you improve cash flow, reduce admin, and get paid on time. From clear invoicing to digital tools and better client relationships, these tips will strengthen your processes and support long term growth.
Why do good payment habits matter?
Here are a few reasons why good payment habits are important:
Poor payment habits strain cash flow
Cash flow is king in business. A consistent inflow of cash ensures you can pay staff, suppliers, and bills without disruption. Poor payment practices, like sending invoices late or failing to chase overdue payments, can lead to a domino effect of financial problems. Research shows that businesses with a high volume of overdue invoices are 1.5× more likely to experience cash flows issues. Late payments force hard choices, from dipping into emergency reserves to relying on credit cards for everyday expenses. They can even hurt your growth prospects: if you’re constantly short on cash, it’s harder to invest in new opportunities or inventory.
Strong payment habits build creditworthiness
Good payment habits also strengthen your financial position in the eyes of lenders and business partners. Promptly paying your suppliers helps build a strong business credit score, while habitual delays can damage it. A reliable payment history shows you manage finances responsibly and consistently.
Over time, these positive behaviours demonstrate that your business is trustworthy, financially disciplined, which can open doors to more favourable credit terms, supplier relationships, and growth opportunities.
Lenders assess your payment behaviour
When applying for a business loan, lenders often look closely at how consistently you pay suppliers, how quickly you collect from customers, and whether your cash flow is steady. These indicators directly affect your ability to secure funding, and may influence the loan amount, interest rates, or repayment terms you're offered.
If you're preparing to apply for funding, now is the time to tighten your payment processes so you can present a strong financial picture.
8 tips for good payment habits
Here’s 8 tips you can use to improve your payment habits.
1. Use clear and timely invoices
Your invoicing process is the starting point for getting paid. Make sure your invoices are accurate, easy to read, and sent as soon as the job is done. Each invoice should include:
To avoid mistakes or missing details, you may want to use an invoice template. Many businesses also benefit from switching to digital invoices, which are delivered instantly via email or a client portal and can include “Pay Now” buttons to make payment even easier.
2. Establish transparent payment terms
Clear payment terms remove uncertainty and set expectations from the start. Decide on a reasonable payment window (for example, 14 or 30 days) and communicate it clearly in your contracts, proposals, and invoices.
Always include the payment due date and accepted payment methods. You can also outline any applicable penalties or statutory interest on late payments (UK law allows you to charge 8% plus the Bank of England base rate on overdue invoices).
Setting clear terms is not about being heavy-handed, it’s about creating mutual understanding. If a client knows exactly when and how to pay, they’re far more likely to do so on time.
3. Use technology to automate invoicing
Manual invoicing takes time and leaves room for errors. By using accounting software such as Xero, QuickBooks or FreeAgent, you can automate much of the process, from invoice generation and delivery to payment reminders and status tracking.
Automated systems ensure your invoices are always sent promptly and consistently, and many platforms let you track when a client has viewed or paid the invoice. Some even allow you to add one-click “Pay Now” buttons that make it easier for clients to settle invoices quickly.
What if clients still pay late?
Even with great systems in place, some clients will delay payment. If you still find yourself waiting on payments, invoice finance could help. It allows you to access up to 95% of the invoice value upfront, improving cash flow while you wait for your customer to pay.
4. Implement a consistent follow-up strategy
Even with the best processes in place, some clients will still pay late, so it's essential to have a structured follow-up approach.
Start with a polite reminder a few days before the due date. If the payment hasn’t been made, follow up again the day after it’s due. If more time passes, consider calling the client directly, this often leads to a quicker resolution and gives you a chance to discuss any issues.
Consistency is key. When clients know you always follow up, they’re less likely to delay payment in the first place. Most accounting platforms allow you to schedule automatic reminders, but adding a personal touch where possible can improve results.
5. Switch to digital payment solutions
Offering a range of digital payment options is one of the easiest ways to get paid faster. Today, most clients expect the convenience of paying online, whether by credit/debit card, PayPal or bank transfer. For example, adding a “Pay Now” button that links to a payment link to your invoice can turn a pending payment into an instant one.
For recurring payments, direct debit is especially effective: once set up, payments are collected automatically, no chasing required. It’s secure, reliable, and reduces failed payments. This results in high success rates, unlike cards, bank accounts don’t expire or get lost, so there are fewer failed payments. It’s no surprise that direct debit has become the third most popular payment method in the UK as of 2022.
Although some digital payment methods come with small fees, the speed and certainty of getting paid usually outweigh the cost. Plus, digital transactions are easier to track, helping you manage your cash flow in real time.
Offering buy now, pay later to improve cash flow
You can also offer Buy Now, Pay Later options like iwocaPay, which allow customers to spread payments over time, while you get paid upfront. This reduces friction at the point of sale and gives clients more flexibility, without compromising your cash flow.
6. Monitor your cash flow regularly
Good payment habits aren’t just about sending invoices, they’re also about staying actively on top of your cash flow. That means regularly tracking what’s coming in and going out, and spotting potential shortfalls before they become problems.
If you know certain clients tend to pay late, or that some months are slower than others, you can plan ahead. Track expected inflows (like customer payments) against outflows (such as bills, payroll, and rent) weekly or monthly to stay ahead of any cash gaps. If a major invoice looks like it could be delayed, you’ll have time to chase it early or explore short-term financing.
Toby Ishmael, Senior Partnership Manager at Capitalise explains:
"By reviewing your cash flow weekly (or at least monthly), you’ll also see if your average collection time is improving as you implement good habits."
Using your Capitalise account makes this even easier. By connecting your cloud accounting software, you can see your outstanding invoices alongside the credit risk of each client. If a customer’s business credit score is declining, it could be a sign they’re struggling, giving you a clear signal to prioritise chasing that payment before it becomes a bad debt.
Over time, you should also keep an eye on metrics like Days Sales Outstanding (DSO) — the average number of days it takes to get paid after invoicing. A lower DSO means cash is coming in faster and your payment processes are working.
By staying close to your numbers and acting early, you can avoid surprises, manage risk, and keep your business in control of its cash.
7. Build strong relationships with clients and suppliers
Positive relationships can make all the difference when it comes to getting paid on time. When you communicate clearly and provide reliable service, clients are more likely to prioritise your invoices.
Simple gestures like thanking customers for prompt payment can reinforce good behaviour. And if a long-term client is experiencing temporary cash flow issues, a good relationship means they’re more likely to be honest and work with you on a solution.
Similarly, being a prompt payer with your suppliers builds trust and credibility. In return, suppliers may offer you more flexible terms, extend credit, or support you through busy periods. Some also report payment behaviour to credit agencies, which can help strengthen your business credit profile.
8. Continuously review and improve your payment process
Good payment habits are not a one-time setup, they require regular review and ongoing improvement.
It’s important to periodically evaluate how well your current payment process is working. For example, you might notice that invoices sent on Fridays tend to get paid later, possibly because they are overlooked over the weekend. In that case, switching to sending invoices on Mondays could lead to quicker payments. If you identify a client who consistently pays late, you may decide to tighten their credit terms or request a deposit upfront.
Reviewing your accounts receivable ageing report is also a helpful habit. This report shows which invoices are overdue and by how long, making it easier to spot patterns, repeated late payments, or clients who may need more attention.
Staying informed about new tools and technologies can also make a big difference. The world of fintech is evolving quickly, and there are often new platforms that allow for faster payments or better integration between your invoicing system and your bank.
You can also improve efficiency with small process changes. For example:
Finally, it's worth reviewing your credit control policy as your business grows. If you’re working with larger clients or extending more credit, it’s important to have safeguards in place. This could include running credit checks or setting credit limits to reduce the risk of non-payment. When you introduce any new policy, like charging late fees or offering early payment incentives, be sure to monitor the results and adjust your approach if needed.
Strong payment habits create a foundation for smoother operations, better cash flow, and stronger relationships. By consistently applying these tips, you’ll put yourself in a stronger financial position and reduce the stress of unpaid invoices.