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How is late payment interest calculated?

For many companies across the UK Late payments aren’t a rarity and are the norm. The statistics show that around £14.2 billion to late payment each year, and 58 percent of SMEs in the UK think that late payment puts their company at risk of failing.

Our research on’money mutedness’ also reveals that the particular British habit of not speaking up is one of the reasons that contribute to companies being either under- or not paid. 25 percent of British small-scale enterprises are awkward talking to their clients and suppliers about the issue of money.

Small and medium-sized enterprises are especially susceptible to cash flow issues as well as late payments being a major issue in many sectors – such as the transportation industry, utilities and those in media, the danger of not being able to pay bills is real.

There are many options to pursue late invoices, such as the possibility of charging interest on bills that are overdue. Here are the most effective ways to take action against late payers as well for a brief overview of late payments’ interest rates.

What should I do before imposing late payment penalties?

It is important to remember that charging interest for late payments should only be a last resort as it can harm your business’s relationship with the client. If you’re faced with an unpaid bill there are ways to handle it prior to escalating the issue:

Send an email late invoices can be resolved simply by communicating with. If the invoice hasn’t been paid within 1-3 days of the due date of the invoice then send an email to remind.

Call if the payment hasn’t been received within 7 days, you can ask someone more experienced on your team to call and contact you.

Send a formal letter If your initial appeal falls upon deaf ears, try to escalate issues by making an official request for money.

In most cases the amount should be sufficient for your customer to pay. However, if you haven’t heard back then you might have to send a final notification stating that you’ll charge interest for late payment.

What is the appropriate time to charge interest on late payments?

As per the Late Payment of Commercial Debts Act which is in force, you are entitled to the cost of interest and debt recovery If a company is behind in the payment of goods and services. states that , if the payment date is set, the payment should be paid within 30 calendar days (for government agencies) or within 60 day (for businesses). If a date for payment was not set the payment will be deemed to be late for 30 days after receiving the invoice, or within 30 days of the time the services or goods were provided (if the latter occurs later). From this point you may begin to charge late interest on the payment.

Click here for our late payment interest calculator.

How is the interest on late payments determined?

If a company is in the process of being delayed in paying their bills and you are unable to make payment, you may charge statutory interest of 8%, plus an additional 8%. This is in addition to the Bank of England base rate for transactions between businesses. At present, the basis rate for late payments is 0.75 percent, however it is subject to change every now and then and you can determine the most current late payment interest rate by logging onto the official Bank of England website. Be aware that you can’t be able to claim statutory interest when you have a different interest rate has been specified in the contract you signed. How is late interest on payment determined? Here’s an example of businesses that are in debt of £2,000, with an Bank of England base rate of 0.75 percent:

The annual statutory interest rate in these figures would be £175 (2,000 multiplied by 0.0875 is 175)

Divide £175 by the number of days to determine the daily rate of interest. In this instance it’s 48p (175 + 36 = 0.48)

If you assume that the payment is 30 days late, you’d be owed £14.40 (30 times 0.48 equals 14.4)

In addition to the late payment interest In addition, you may also be eligible for cost of debt recovery (a fixed amount to cover the expense of recouping all late-paying customers). But, it’s important to note that these sums are small:

In the event that you are due more than £999.99 you are able to charge up to £40

If you’re owed between £1,000 to £9,999.99 You can claim up to £70.

If you owe £10,000 and above, you may set a maximum charge of £100

In the same way, if you follow the same model we discussed previously, you’d be in a position to add £70 costs for debt collection on top of your total invoice and claim up to an amount up to £2084.4.

There are numerous late payment interest calculators that are available on the internet, so you don’t have to figure out the total amount by yourself. Here’s a link to Small Business Commissioner’s late-payment interest calculator, which will assist you in determining exactly the amount you can claim.

What is the best way to charge late interest on payment?

If you want to charge your customer late interest on payments, you have create a new invoice with the updated price. It is important to note your invoice clearly that it is a late payment charge , and also note that you have the legal authority to charge the charge. It might also be beneficial to reference prior correspondence regarding the late payment of your original invoice.

If they aren’t paying?

If your customer has not replied, you might need to pursue legal proceedings. It is best to avoid this if you can, as it’s the most drastic option and could close your business relationship with the client. If, however, late payments and subsequent cash flow problems pose an imminent risk to your company then you might have the only option. Before taking this step take into consideration the costs of legal fees as well as the length of time legal proceedings will take up. If you’re looking at the bigger picture, it might be beneficial to simply write off the money you lost.