Unfortunately, late payment and not being paid on time is a common problem for a lot of businesses.
Especially smaller businesses.
Businesses who rely on payments being on time in order to keep a healthy cash flow.
To help alleviate the growing problem of late payment, businesses are now encouraged to include fees and interest charges on commercial debts as part of their payment terms and conditions.
Including these elements in your contract agreements and invoices not only helps to state the consequences of missing payment due dates, but it can also help speed payments up, keep you in control, and show you mean business when it comes to credit control.
(Learn more about contracts and agreements on our website here.)
Interest on unpaid invoices
At Direct Route, clients often ask, “can I charge interest on late or unpaid invoices?”
You can absolutely charge interest on unpaid/overdue invoices as long as you abide by the law.
Invoices are legally binding documents, so it’s important to clearly state all payment terms and agreements, including late payment fees and how customers can pay.
Interest on late payment invoice
- Late payment and interest charges apply to business-to-business transactions only.
- Typically, people have a net of 30 days to pay an invoice; however, this can vary from company to company, and you are entitled to set alternative payment due dates.
- A late payment fee is a fixed cost that you can put toward the cost of recovering the outstanding debt (if you have outsourced this to a third-party collection agency). You can also add this fee to the interest already incurred on the unpaid invoice.
- You must decide if you charge contractual interest (you agree on a rate of interest in your contract) or statutory interest (8% plus the Bank of England base rate).
But is it worth it?
Should I charge late fees?
Keeping a good relationship with your clients is key. This means late payment charges should be seen as a motivator to encourage clients to pay rather than as a means to get more money out of people.
So, is it as simple as charging a late payment fee or adding interest?
Before diving straight into adding interest and late payment charges, we advise that you follow a staged approach, i.e., send an email or letter to inform debtors that the unpaid invoice is now outstanding and late payment fees will be applied as per the terms of the agreement.
You must also check that all the work has been fulfilled and payment has 100% not been received (we sometimes understand things can be missed or filed against the wrong account, so it is always worth double-checking everything beforehand).
If there is a problem or issue with the product or service, address this issue as soon as possible to avoid further payment delays. However, make sure the complaint is genuine and not a delay tactic. Until this situation has been rectified, sending a late payment charge could aggravate the customer further.
Being mindful that each situation is different is key.
Circumstances can occur beyond our control, and if it is unusual for a client to not pay on time, what is the underlying reason? In these situations, it may not be appropriate to jump straight into charging a late payment fee or additional interest.
Before adding interest or a late payment charge, try to speak to your customer to inform them that payment is now overdue and ask them when you can expect the invoice to be settled.
Sometimes things get overlooked, and your client might be grateful for the reminder.
How to charge interest on late payment invoice
Invoice unpaid…contact the client, remind them about the invoice, and that payment is now due. If this communication takes place via email, reattach the original email and include payment details.
It is then expected that you will give your client a reasonable amount of time to reply.
You must also keep a record of all communications; even if there is no answer, the call should still be recorded as an attempt.
If there is still no response to phone calls and emails and the debt has been outstanding for a considerable period of time, consider working with a debt collection agency.
A professional and experienced debt collection agency can help collect outstanding debts and add appropriate late payment fees and interest as required.
Having a robust credit control procedure in place is the most effective method of ensuring prompt payment, and at Direct Route, we have the tools and the right processes in place to ensure continued successful collections.
Charging late payment fees is not mandatory, but it most certainly helps to keep control of your cash flow.