Late payments can prove fatal to new businesses. In 2021, 38% of start-ups failed because they ran out of cash. With cash flow being the largest barrier to the success of new businesses, every company has a legal right to charge interest on overdue invoices. If your business is struggling with late payments, it’s good to know how much you can charge.
Continue reading to find out:
- How to calculate interest
- When a payment is considered late
- When you should charge interest
- Managing your invoices with Countingup
How to calculate interest
Calculating the interest on late commercial payments is a relatively simple process. Interest on business-to-business debts is calculated at 8% plus the Bank of England’s base rate (currently 0.1% at the time of writing).
Here’s the calculations you’ll have to do to understand the interest you can charge:
Amount owed x Interest rate = Annual interest
Annual interest ÷ 365 = Daily interest
Daily interest x Days late = Interest owed
With this in mind, it becomes easy to figure out how much interest you are owed.
For example, if another business owes you £2,000. With an 8.1% interest rate, the annual interest is £162. This breaks down to 44p per day, and if they’re 60 days late, then you’ll be owed an additional £26.63 in interest. The total on a new invoice would be £2,026.63.
You are not obliged to add interest to every overdue payment, but you must inform your client if you do.
Interest isn’t the only cost you’re allowed to add. When an invoice is overdue, you are also entitled to claim debt recovery charges on top of each outstanding payment. These are set amounts, relative to the size of the debt owed.
For amounts up to £999.99, you can charge an additional £40. This rises to £70 for amounts between £1000 and £9,999.99. Finally, for all debts of £10,000 or more, the debt recovery charge is £100.
Using the example above, you’d be able to claim a new total of £2,096.63 for a payment that’s 60 days overdue.
When a payment is considered late
While it’s common courtesy to pay an invoice promptly, different businesses can have varying time frames to pay. This time frame can be specified either verbally or in writing. With all agreements surrounding payment, it is best practice to have written agreements, since a verbal one can be easily contested.
Any agreement is considered contractual, and maximums are typically limited to 60 days. Once this agreed credit period has expired, an invoice becomes an outstanding debt and can be subject to the daily interest calculated above.
In certain circumstances, an agreed credit period may not have been set. In this case, the law states that the period is 30 days from receiving the invoice, or delivery of the goods/services (whichever comes later).
You must notify your client when you begin charging them interest. This is preferably done by sending an updated invoice, since a notification via phone call may be disputed in court.
It can feel both frustrating and awkward to regularly ask for a payment, even though that is money you are entitled to. If you are unsure of how to deal with customers refusing to pay on time, it may be worth looking at our guide to chasing late payments.
When you should charge interest
It is worth noting that charging interest can damage your relationship with your client. Before you decide on whether to add interest and debt collection fees, you should consider how often the client is late with payments, and if you could cope without their repeat business.
For example, if a customer usually pays promptly, then it may be worth speaking to them and determining the reason first. You may even be able to come to an agreement, helping to foster a better relationship in the future.
On the other hand, if a difficult client is consistently paying late (even after discussions), it may be beneficial to add interest to the amount they owe. Potential outcomes include prompt payment, or getting the courts involved to claim what you’re owed.
While legal intervention is not the desired outcome, it may be the only way for you to claim what you are owed. It should be treated as a last resort, when all other options have been exhausted.
You may also decide against adding interest if the owed amount is relatively small. The interest gained on an order of £100 would only be 8.1p after an entire year. In this case, the interest is almost completely insignificant and may irreparably damage the relationship with your client.
Managing your invoices with Countingup
Financial management can be stressful and time-consuming when you’re self-employed. That’s why thousands of business owners use the Countingup app to make their financial admin easier.
Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like invoicing on the go, receipt capture tools and cash flow insights, you can confidently keep on top of your business finances wherever you are.
The invoicing feature is perfect for keeping an eye on any late or upcoming payments, and can allow you to send an updated invoice as needed. Great for managing any overdue payments.
You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward!
Find out more here and start your 3 month free trial today.