Education

What are late payment fees?

9 Aug 2021

Running a business can be time consuming and challenging, so when it comes to making sure your invoices are settled many business owners simply don’t have time to chase. Late payments are a common issue for small business owners and by applying a late fee payment on invoices, SMEs apply another layer of legislative protection.

What are late payment fees?

A late payment fee is an additional charge on top of an overdue invoice from a business that has clearly stated its payment terms. If the due date of an invoice has been missed and the invoice is still unpaid, then a late payment fee is applied. Late payment fees were introduced to help business owners solve the issue of delayed payments or overdue invoices- a key part of running a business.

In 1988, the Late Payment of Commercial Debts act was introduced by the government to protect and empower business owners to use late payment fees to ensure their invoices were paid on time and they didn’t end up with commercial debt.

Can I charge for a late payment?

In short - yes. If you’re running a business that generates invoices, you can apply a late payment charge to them. Depending on what industry your business is in and the size of your customers, you might want to consider applying this fee at slightly different rates. 

Unfortunately, you’ll also only be able to charge them once for late payment - even if it takes your customers months to repay you. Having a late payment fee in your invoice terms does allow you to claim recovery costs in the form of interest too, so if your customer still hasn’t paid after 60 days you may be able to claim additional interest.

What is a reasonable late payment fee?

Whilst there isn’t strictly speaking a ‘standard’ amount for late payments, many businesses tend to use the government’s recommended 8% fee amount as it helps compensate them for the inconvenience of late payments. This is typically in line with what other businesses can expect if they’re late to pay you,  although there are exceptions so if you’re handling invoices regularly it’s best to check if they have a late payment fee stated on their invoice terms

Should you add late payment fees to your invoices?

Again, the choice is yours as a business owner and declaring that you have a late payment policy is also down to you to decide. If you have regular customers, who aren’t very prompt at making payments, or you regularly receive late payments for your invoices, it might be a great idea to apply a fee to your next invoice. This may help to encourage more timely payments and act as a deterrent.

If you’re waiting for late payments or invoices to be settled, there are of course other finance options that would help your business continue running smoothly and help with business continuity. 

Funding options such as a business overdraft or invoice financing; a loan that covers up to 85% of your owed invoices could be great choices for your business. These facilities can be made available quickly and easily, giving you the working capital you need to carry on running a business whilst you wait for late payments to be settled.

If you're a business owner who is looking to boost your working capital and think invoice finance may be right for your needs, our Business Finance Experts are here for you.

Start your journey towards a better funding future and speak to our team today.

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