8 Aug 2021
Late fees are often included within invoices as a penalty for customers that don’t pay their bills on time. Used by businesses of all sizes, late payment fees are used to encourage customers to pay their invoices on time. This then prevents business owners from needing to resort to short-term loans to pay their bills.
As a small business owner, there's a very high chance you’ve experienced some late payments before - but how late is acceptable? And what should you do if it keeps happening or means that your business is now in debt?
Maybe you’ve had to wait 60 days before reminding a customer about your invoice, and want to ensure that experience doesn’t happen again. If you are continually chasing invoices, then applying a late payment fee could be the difference between being paid promptly by your customers and needing additional funding to cover your outgoings.
Whilst there isn’t a standard late payment fee, the government suggest charging a fee of 8% of the total invoice plus the Bank of England base rate for business to business transactions (which is currently 0.1%). This was introduced in 1988 to help smaller businesses who were getting into debt or using loans such as invoice financing or bridging loans to pay their bills whilst they wait for their own invoices to be paid.
It’s not a legal requirement to have a late fee in place, but your business is protected by government legislation that you can use if an invoice hasn’t been paid after 60 days. If you’ve put a late fee charge in place for your business, you’ll be entitled to claim that fee amount as well as 8% interest on the unpaid invoice.
The choice to charge a late fee for an invoice is down to you as a business owner - if you’re happy with the payment terms that your invoices are settled in and haven’t incurred any debt from overdue invoices, it may not be necessary to have a late fee payment in place.
Again, this is dependent on a few things like the size of your business and the invoices you raise. Some businesses who are invoicing smaller amounts (£100’s not £1000s) may apply late fees of up to 10%, so it’s important to consider your own business needs and whether the customer is likely to comply.
Using the recommended fee of 8% set by the government does mean more businesses are aware of this interest charge if they’re late and may be more accepting to pay it, compared to if you use a fee you’ve set yourself. If you’re looking to set your own business’s late fee, it’s best to consider some other points such as:
Whether the service you provided was on time (or delayed)
The quality of products or services you provided
If the late fee you’ve chosen reflects the customer’s own business affordability
If you’re new to running a business or want to introduce a late fee after a few overdue invoices, it’s important to let your customers know before you change your payment terms. Communicating any changes in fees is really important to maintaining good business relationships so it is important to be transparent.
Let your existing customers know before you raise the next invoice that you’ve added a late payment fee and share your new terms including when you expect to be paid (whether it’s within 30 days etc.).
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