Late Payment Charges: What You Need to Know
Whether you’re a sole trader or a larger business, the last thing you want from clients is a late payment. This disrupts cash flow, and can have serious consequences for you, your business, and even client relationships. This is where late payment fees come into play.
Keep reading to learn more about what late payment charges are, and how you can use these as part of your payment structure on invoices…
What are late payment charges?
A late payment fee is effectively an additional amount you can charge after a set period has passed from the initial invoice date. This is to act as both a deterrent, and a way for businesses to offset any financial damages due to the late payment.
Are late payment charges legal?
Yes, late payment fees are perfectly legal. In fact, the legal terms for late payment charges are set out in the Late Payment of Commercial Debts (Interest) Act of 1998, which was further expanded and amended in 2002 and 2013.
According to the act, late payment charges may be applied after 30 days for suppliers of public authorities, or 60 days for business transactions.
Note that this period is set from the date of sending the invoice, or delivery of goods or services, whichever is later.
The act is effectively a default measure for businesses to use in cases of late payments. If you’d prefer, there is scope to mutually decide on your own late payment terms, as long as this is fair and reasonable and amounts to a substantial remedy for the late payment of the debt.
What are the types of late payment charges?
Understanding how much to charge for late payments depends on knowing the types of fees you can apply. Late payment fees can be separated into three main categories, and each come with their own rules and requirements before they can be applied.
Interest
Charging interest on late payment fees is standard practice when it comes to commercial contracts and is arguably the most well-known late payment charge.
This can either be a mutually agreed upon rate that is explicitly stated in the contract, or you can use the default provisions set out by the law mentioned above.
For a more in-depth explanation on this topic, read our article on how much interest you can charge on a late commercial payment.
Compensation
Aside from calculating the interest on late payments, you also have the scope to include some measure of compensation per invoice. This provides you an additional buffer and is designed to cover some of the inconvenience you may suffer due to late payments.
Note that this is a flat fee that is calculated in line with the amount you are owed.
According to UK Government guidelines, the amount you can charge for a late payment is as follows:
Size of unpaid debtCompensation£0.01 to £999.99£40.00£1,000 to £9,999.99£70.00£10,000 and over£100.00
Reasonable debt recovery costs
In addition to interest and compensation, businesses also have scope to charge for “reasonable debt recovery costs” where these exceed the amount of compensation you can claim. This is due to a small change in the regulations that makes the debtor liable for the costs of commencing Court proceedings.
This works by charging a fee to the debtor to cover additional costs incurred from attempting to recover the money owed. For example, you can claim back the expense of contacting and hiring a debt collection agency or Solicitors to commence Court proceedings to recover the debt on your behalf. If you choose Thomas Higgins as your debt collection Solicitors, this change in the legislation could mean free debt collection on a successful recovery at claim stage.
Adding late payment charges to an invoice
Your invoices and payment contracts should clearly set out what should happen in cases of late payment of fees. By including protections and clauses for late fees on invoices, both parties have a complete record of the penalties involved with a delayed payment. This helps to avoid misunderstandings or payment conflicts in the future, and also makes it easier for you to understand, calculate and collect your total fee.
Below we’ve explained some best practice guidelines for adding late fees on invoices.
Standardise late payment charges
Having a clearly laid out late payment clause in your commercial contract helps to prevent any future misunderstandings with clients and ensures everyone has the same information to avoid payment disputes.
This is particularly true for contract interest charges and late payment deadlines, where you have decided on a different arrangement than the one set out by law.
Pre-emptively using a standard payment structure with all of your customer invoices prevents clients from feeling targeted or singled out by different elements of their contract. This helps you maintain strong business relationships over time.
A standard clause also means you’re not adding late payment charges retrospectively, which could negatively affect your business relationship with the client in question.
Note that you should make your payment terms and late fees on invoices as clear as possible. Avoid using too much legal terminology to ensure everyone understands the conditions and consequences of any late payment charges.
Notify customers of payment deadlines
Alongside committing to a standardised agreement for late payment charges, it can be worth reminding clients of the payment deadline and agreement before it passes.
This should work to deter late payments in the first place, helping you to keep a positive cash flow and customer relationship. Alternatively, pre-emptive communication can provide you with a written record in any worst case scenario.
I’ve taken these steps, but the payment is still late. What should I do?
Even by taking steps to prevent late payments, they unfortunately can still happen. This could be for a multitude of reasons, and through no fault of anyone. However, late payments can be detrimental to your business and need to be recovered swiftly.
Here at Thomas Higgins, we understand how difficult and inconvenient it can be to handle late payments. That’s why we offer a range of services to assist you with the debt collection process.
We can help you recover the money owed to you, including any interest and compensation that is rightfully yours to claim through late payment fees. We don’t charge commission or take a percentage, so you’ll receive the total amount for a successful collection.
Take control of your cash flow by opening an account with us today or login here and you’ll be able to create new cases, review any correspondence we’ve sent on your behalf, and issue instructions for the next steps you wish to take.
Learn more about our Late Payment Demand Letters now
