Not every business owner knows that they have a legal right to charge late payment fees. The Late Payment of Commercial Debts 1988 Act was established to protect business owners against late and missed payments. It ensures that as a business, if debts are not paid to you on time, you can charge interest and compensation on overdue accounts. As well as providing an insurance policy against late debts for businesses, this also encourages debtors to pay on time.
When is a payment late?
This depends on your payment terms and your individual business collections processes. Generally there are two grounds on which your payment is protected:
- General protection: Unless your payment terms specify a particular payment due date, a client must usually pay you within 30 days of receiving your invoice.
- Business specific: You can set up your own payment terms. This includes discounts for early payments and payments upfront. In fact, it’s becoming much more commonplace for companies to implement shorter repayment terms. Between 70-80% of small businesses give clients a 2 week payment window, and at least 50% of those require payment within 1 week.
Compensation for late payments
Even though you are legally entitled to charge an interest for a late payment, you can also choose not to. According to GOV.UK late compensation charges are calculated in consideration of ‘statutory interest’ – which is 8% plus the Bank of England base rate for business to business transactions. This compensation formula is applicable in all circumstances unless:
- Your supplier-client contract specifies a different interest rate
- Your client is a public authority
Example
You are owed £2,000 and the Bank of England base rate is 0.5%
- The annual statutory interest on this would be £170 (2,000 x 0.085 = £170)
- Divide £170 by 365 to get the daily interest: £0.46 a day (170 / 365 = £0.46)
- After 60 days this would be £11.50 (60 x £0.46 = £27.60)
Make sure you send a new invoice to your client explaining the new total amount, if you do decide to add interest to the money that you’re owed.
You are also entitled to charge a business a fixed sum to cover the cost of recovering a late payment, in addition to claiming interest from it. This is dependent on the amount of debt.
| Amount of Debt | Compensation |
| Up to £99 | £40 |
| £1,000-£9,999 | £70 |
| £10,000 or more | £100 |
How do I recover a late payment?
Initiate Contact: You must be reasonably able to demonstrate that you have contacted the client in an attempt to solve the matter. It might be keep a complete history of calls, meetings and emails with debtors.
Let your client know that their payments are late by sending them an overdue payment reminder.
If this doesn’t work, your next step may be to seek the advice of a solicitor or debt collector.
Intelligent Cashflow
Managing your credit control is crucial, as is distinguishing who your good and bad payers are.
Fluidy’s Intelligent Cashflow gives you a transparent view of both debt and cashflow – allowing you to spot the issues, take action and keep the company’s cash in a positive position.
Find out more about Intelligent Cashflow management with Fluidly
