Pricing the Wait: Building Late-Payment Risk into Every UK SME Quote

The due date is part of the price

Most UK SMEs discover the cost of late payment after the invoice has been issued. The work has been delivered, the payroll has been met and the supplier has been paid, yet the cash sits in a customer’s accounts payable queue. By then, the only available tools are reminders, escalation and, in the worst cases, recovery action.

A more disciplined approach is to treat the payment date as a commercial term in its own right. If a customer wants 45 or 60 days to pay, that is not simply an administrative preference. It is a request for the supplier to fund the customer’s working capital. In 2026, with borrowing costs still material for many smaller firms, that funding has a price. The question is whether the quote, the contract and the credit decision reflect it.

At Galico, the practical view is straightforward: price the wait before it happens. That does not mean adding a crude surcharge to every invoice. It means building a repeatable method for estimating the cash cost of a customer’s payment behaviour, then deciding whether to absorb it, price it, shorten it or decline the work.

A three-scenario stress test

A useful framework begins with three scenarios for every significant quote: contractual, realistic and stressed.

1. Contractual: the customer pays exactly on the stated due date. This is the best case and should not be the planning assumption.
2. Realistic: the customer pays at the average delay you have actually experienced with similar buyers, not the delay stated in the contract. If your invoices to that sector normally settle 18 days late, use 18 days.
3. Stressed: the customer pays at the delay seen in your worst 20% of cases, or does not pay at all for a period. This is the scenario that tests whether the deal is worth the risk.

The cash cost of waiting can be estimated simply. Take the invoice value, multiply by your annual cost of borrowing or the opportunity cost of cash, then multiply by the number of delayed days divided by 365. Add the administrative cost of chasing: statements, calls, portal queries, credit control time and management attention. For a £25,000 invoice delayed by 45 days at a 9% annual funding cost, the direct financing cost is roughly £277 before admin. That may look modest on one invoice, but it compounds across a ledger and across a year.

Then add a bad-debt reserve. If experience suggests a 3% probability of non-payment for that customer type, the expected loss is £750 on a £25,000 invoice. The quote should be assessed against the combined figure: financing cost, admin cost and expected loss. If the margin cannot absorb that, the deal is either mispriced or too risky.

Payment terms that fund the work

Shortening payment terms is often more effective than raising prices. A deposit reduces the amount you finance from day one. Milestone billing moves cash closer to the work. Subscription or retainer models smooth the ledger. For project work, a structure such as 30% on order, 40% at midpoint and 30% on delivery is common because it aligns cash with effort.

For repeat customers, consider net 14 rather than net 30, with a clear settlement discount only where the margin supports it. Avoid offering a discount that simply rewards customers for doing what the contract already required. If a customer needs longer terms, ask what is driving the request. Sometimes it is a genuine procurement cycle; sometimes it is a warning about their own cash position.

Contract wording matters. A practical clause might state that payment is due within 14 calendar days of the invoice date; that interest accrues on undisputed late sums at the statutory rate under the Late Payment of Commercial Debts (Interest) Act 1998, together with fixed compensation and reasonable recovery costs; and that the supplier may suspend work or withhold deliverables where undisputed invoices remain unpaid after seven days’ written notice. Legal advice should be taken for the specific contract, but the commercial principle is to make the consequence of late payment visible before it is needed.

An escalation ladder, not an angry email

Credit control works best when it is boring and predictable. A simple ladder might run as follows: invoice issued on the same day as delivery; a courtesy reminder at day 7; a phone call at day 14; a formal notice at day 21; suspension of further work at day 30; and referral to recovery or legal action at day 45. The exact days should reflect the terms, but the ladder should be agreed internally and applied consistently.

The point is not to threaten every customer. It is to remove the hesitation that causes SMEs to wait another week, then another month. A customer who values the relationship will respond to a professional process. A customer who does not respond is giving you useful information about the credit risk.

A checklist for deciding whether a customer is worth the credit risk

Before extending meaningful terms, check the following:

• Companies House filing history: are accounts filed on time, and is there any sign of distress or frequent director changes?
• Credit reference data: does the score match the payment terms being requested?
• Trade references: can two suppliers confirm actual payment behaviour, not just satisfaction?
• Concentration risk: would losing this customer materially damage your cashflow?
• Dispute history: does the buyer routinely query invoices or change purchase order requirements?
• Ownership and group structure: is the contracting entity the same as the entity you believe is paying?
• Seasonality: will the due date fall in a quiet period for the customer?

The answer to these questions should feed a simple credit limit. A new customer may start on a deposit and a low limit. A long-standing customer with a clean record may earn longer terms. The limit should be reviewed when the order size, sector or ownership changes.

Late payment is not only a debt-collection issue. It is a pricing, contracting and customer-selection issue. UK SMEs that treat it that way in 2026 will spend less time chasing cash and more time choosing the work that pays.