Can I charge late payment interest?

Bookkeeping, Cashflow & Forecasts,

Recent research has shown that 53.4% of small businesses spend four or more hours every week managing unpaid invoices. The opportunity cost of this time is huge, when every minute could otherwise be spent looking after good customers, increasing sales, training or any one of a million other tasks. Charging Late Payment interest can go some way towards reimbursing your business for these ‘lost’ hours, but many business owners are unsure where they stand.

Let’s take a look.

What is Late Payment Interest?

There are two types of Interest:

  • Contractual Interest – Detailed in agreed payment terms, the original order or contract. if you haven’t obtained a signed contract, or terms of business, from your customer you can’t charge Contractual interest.
  • Statutory Interest – This is allowed by law, under the Late Payment of Commercial Debts Act, for business creditors to charge interest for late payments. You cannot claim Statutory Interest if your terms include Contractual interest.

You cannot claim Statutory Interest where your customer is a consumer, only where they are a business. To charge interest to a consumer, acting as an individual, you are reliant on your Contract, so make sure you get your terms and conditions checked by a solicitor as you may need to rely on them!

When can I charge Late Payment Interest?

Unless your terms state otherwise, Statutory interest can be charged on amounts that remain unpaid 30 days after the invoice is received by the customer OR you deliver the goods or services, if this is later.

How do I calculate Late Payment Interest?

Statutory Interest is calculated at 8% above the Bank of England Base Rate for business to business transactions. You can check the Bank of England Base Rate movements here.

The calculation for Late Payment Interest, whether Statutory or Contractual is the same, as follows:

(Debt x Total Interest rate x the number of days late) / 365 = Day rate for interest

Multiply this amount by the number of days the payment is late, to get a total amount due to the point of calculation.

(Remember that you can charge 8% above the Bank of England Base rate, so at the time of writing the Base Rate is 3%, hence you’d use 11% in the calculation.)

What else should I think about?

Charging a customer for late payment may be worthwhile, but it can be the death knell for a business relationship. Think carefully about the likelihood of you wanting to work with or for the customer in the future before you impose any charge.

Some customers may offer to pay you Late Payment Interest rather than apply for finance, but if that’s the case, think carefully before you accept the suggestion. You could be subsidising a business that cannot raise finance, which should sound alarm bells!

Debt Recovery Costs can be claimed too…

You can charge a business a fixed amount towards the costs associate with recovering a late payment, as well as Late Payment Interest. These amounts are set by late payment legislation, and depend on the amount you are due. This is a ‘one-off’ charge per debt amount.

Amount of debtWhat you can charge
Up to £999.99£40
£1,000 to £9,999.99£70
£10,000 or more£100

There are many ways to improve a debt collection process. If you think there are gaps in yours, please get some advice, and start to work on tightening things. You can very quickly see big improvements from some simple tweaks, and these can often be implemented well within the four hours mentioned in our opening paragraph.

If we can help at all, please get in touch; we’re here to help with this or any other cash improvement advice that you may need.

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