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How to Calculate Late Payment Interest

For many businesses across the UK, late payments aren’t the exception, they’re the rule. The figures speak for themselves – around £14.2 billion is owed in late payments each year, while 58% of SMEs in the UK believe that late payments are placing their business at risk of failure.

SMEs are particularly vulnerable to cash flow issues, and with late payments on the rise in many industries – including the transport industry, the utilities industry, and the media industry – the threat of unpaid bills is very real.

Fortunately, there are multiple ways to chase late invoice payments, including charging interest on overdue bills. Here are some of the best ways to escalate action against late payers, as well as a quick guide to late payment interest rates.

What steps should I take before charging late payment interest? 

It’s worth remembering that charging interest on late payments should be a last resort, as it could damage your company’s relationship with the customer. If you’re dealing with a late payment, here are some of the steps you can take before escalating the situation:

  1. Send an email – Sometimes, late invoice payments can be resolved by simply getting in touch. If payment hasn’t been paid 1-3 days after the invoice due date, send a polite email as a reminder.

  2. Make a call – If payment still hasn’t been made after 7 days, ask a more senior member of your team to pick up the phone and get in touch.

  3. Post a formal letter – If your initial outreach falls on deaf ears, escalate matters by sending a formal request for payment.

Typically, this should be enough to prompt your customer to send payment. However, if you still haven’t received a response, you may need a send a final notice stating that you will be charging interest on their late invoice payment.

When is it acceptable to charge late payment interest?

According to the Late Payment of Commercial Debts Act, you can claim interest and debt recovery costs if a business is late in paying for goods and services. Gov.uk states that if a payment date has been agreed, payment must usually be made within 30 days (for public authorities) or 60 days (for business transactions). If a payment date has not been agreed, a payment is considered to be late 30 days after the customer receives the invoice or 30 days after the goods/services have been provided (if this is later). At this point, you can begin charging late payment interest.

How is late payment interest calculated?

If a business is late in making payment, you can charge statutory interest, which is 8% plus the Bank of England base rate for business to business transactions. Currently, the base rate is 0.75%, but it changes every so often, so you can find out the most up-to-date late payment interest rate by visiting the Bank of England’s official site. However, note that you cannot claim statutory interest if a different rate of interest has been stated in your contract. So, how is late payment interest calculated? Here’s a quick example for a business that is owed £2,000 with a Bank of England base rate of 0.75%:

  • Annual statutory interest for these figures would be £175 (2,000 x 0.0875 = 175)

  • Divide £175 by 365 to find out the daily interest. In this case, it is 48p (175 / 365 = 0.48)

  • Assuming payment is 30 days late, you would be owed a total of £14.40 (30 x 0.48 = 14.4)

In addition to late payment interest, you can also claim debt recovery costs (a fixed sum for the cost of recovering any late payments). However, it’s important to remember that these amounts are relatively limited:

  • If you are owed up to £999.99, you can charge a maximum of £40

  • If you are owed between £1,000 and £9,999.99, you can charge a maximum of £70

  • If you are owed £10,000 or more, you can charge a maximum of £100

So, following the example we used before, you would be able to add £70 debt recovery costs to your overall invoice, and claim for a maximum amount of £2084.4.

There are many late payment interest calculators available online, so there’s no need to work out the entire sum on your own. Here’s a link to the Small Business Commissioner’s late payment interest calculator which can help you work out exactly how much you’re able to claim for.

How do you charge late payment interest?

In order to charge your customer for late payment interest, you need to draw up another invoice that includes the new cost. Be sure to state on the invoice that this is a late invoice payment charge and note that you have the legal right to charge it. It may also be a good idea to reference previous correspondence regarding the nonpayment of the original invoice.

What happens if they still haven’t paid?

If your customer still hasn’t responded, you may need to resort to legal proceedings. This should be avoided if possible, as it is the most severe action and is likely to end your relationship with the customer. However, if late payments and the ensuing cash flow problems represent an existential threat to your business, you may have no other choice. Before you take this action, consider the potential cost of legal fees and the amount of time that legal proceedings are likely to consume. On balance, it may be worth simply writing off the lost payment.

We can help

Late payments can affect your cash flow and – in the most extreme cases – cause you to go out of business. Find out more about how GoCardless can help you automate customer payments, so you never have to worry about late payments again.

Interested in automating the way you get paid? GoCardless can help

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