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Late payment fees for your business: how and when to charge them

by Raquel
| August 4, 2021
Reading time: 4 minutes
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If you’re a small business or freelancer, you’ll be too familiar with the stress of late payments and the emotional toll they can take. But when should you say “enough is enough” and charge late payment fees? How much should you charge, and when?

Why should I charge late payment fees? 

The idea of charging late fees might not sound appealing. When you’re trying to maintain good relationships with clients, it’s natural to want to make a good impression – and late payment can be an issue you’d rather not bring up. 

But late payment can have a knock-on effect on your cash flow, and a backlog of them could spell disaster for your business in the long run. 

Late payment fees are designed to encourage your client to pay you on time, every time, and make payment delays a thing of the past. You can refer to the Government’s guidance on this or choose to set your own (or both!).

Your rights by law

1. The right to charge interest

In line with UK Government guidelines, you can charge statutory interest on late payments. Statutory interest is 8% plus the Bank of England base rate for business-to-business transactions (the current rate is 0.1% but it can fluctuate every few months). 

Let’s say you’re owed £4,000 by a client. The annual statutory interest on this amount would be £324 (0.081 x 4,000). To work out the daily interest, divide this figure by 365, which gives 89p per day. If a payment is 50 days late, multiply this 89p per day by 50 (number of days) to get £44. Once you know the sum, send a new invoice with the new amount, adjusted for interest (new amount: £4,044).

Late payment formula: (0.08 + Bank of England Base Rate) * amount owed * number of days overdue / 365 (days in a year)
Calculate statutory interest on late payments with this formula.

2. The right to claim debt recovery costs 

In addition to charging interest, you can also charge a fixed sum, in line with the Government’s late payment legislation. Here’s what you can charge:

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

In the example above, you could charge a lump sum of £70 in addition to the £44 interest, giving you a total amount of £4,114. That’s about a 3% increase on the initial invoice amount, all from a 50-day payment delay.

Waiting for late payments to come through can be soul-destroying, but you can take control. Setting late fees is just one way you can make sure you get what you’re owed on time, every time

Establishing your own late fees

You can also set your own late payment terms, either by agreeing on these at the beginning of a business relationship or by writing to an existing client to set out your updated terms. However, you notify your client, make sure that you clearly state the terms on every invoice you raise.  

Gradual late payment fees

Gradual fees mean that the amount owed will increase incrementally. For example, late payments could be subject to a 0.5% fee for every day that a payment is late. (Taking the £4,000 figure above, you would be owed an additional £20 per day).

Fixed late payment fees

Fixed fees involve a lump sum charge. For example, you could charge a £50 late fee on invoices over £1,000 which are over two weeks late. 

What are the alternatives?

It’s worth bearing in mind that late payment fees aren’t always the answer. They should only be used as a last resort, and more often than not it’s better to try to ascertain what’s going on with your client and why they might be paying you late. 

Establish a payment plan

If you sense your client is having cash flow problems, talk to them and see if you can arrange a better payment schedule with them. Initiating that conversation can help you identify the root cause of the delays and find a solution that works for both of you.

Offer a one-off payment extension

If this is the first time your client has paid you late, write to them and explain that while you normally charge late payment fees, you’re willing to establish a grace period and extend the payment window, just this once. As well as showing that you’re reasonable and understanding, you’re acknowledging that you won’t accept late payment as a precedent. Be fair but firm from the outset.

Offer an early payment discount 

If you prefer a softer approach, you can instate the opposite of late payment fees: early payment discounts. These can encourage your clients to pay you earlier than the invoice deadline. The discount you choose to set is completely up to you – and you’ll soon find out if it works or not!

Use an instant payment platform

Late payments can be slowed down even more by the type of payment system used, with some payments taking days to clear.

Payment platforms like Juno allow you to request funds from your client, who then pays you in just a few clicks through their own online banking account. The funds go straight to your bank account in real-time, offering a faster, cheaper, and more secure way to get paid.

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