Should You Charge Late Payment Fees on Invoices?

Slow payments are among the most frustrating aspects of running a small business. It can be difficult to know how long to leave it before you chase the client, what tone to take when you do chase, and what to do if there's still no success. One option is to introduce late payment fees, which brings with it its own pros and cons. So, should you consider implementing fees, and if so, what's the best way to go about it, and how much should you charge?

What is a late payment fee? 

A late payment fee is an extra charge levied on clients if they don't settle an invoice by the agreed-upon date. If you don't agree a date, it will usually be assumed that payment is due 30 days after the client receives your invoice – or 30 days after you deliver the goods or services if this is later.

Is it legal to charge late payment fees? 

In the UK, late payment fees are allowed under the Late Payment Law, which gives all businesses, whether sole traders, freelancers or limited companies, the statutory right to charge interest for late payments unless otherwise agreed. To charge a late payment fee, you must include payment expectations within your original contract or sales agreement and state the due date and the late fee percentage or amount in the invoice.

As of 2013, legislation also allows the business owner to claim any other reasonable costs related to collecting the debt. The compensation is recoverable according to the level of debt. For example, for any debt less than £1,000, a fee of £40 is applicable. For debts that are more than £1,000 and less than £10,000, a fee of £70 is recoverable. For all debts that are above £10,000, a fee of £100 is recoverable.

What is a reasonable late payment fee? 

According to the UK government, the maximum interest you can charge on late commercial payments is 8% plus the Bank of England base rate. So, if your business is owed £1,000 and the Bank of England base rate is 0.5%, the annual statutory interest would be £85 (1,000 x 0.085 = £85) or 23p per day (85 / 365 = 0.23).

It should be noted that if you state in the invoice that your late payment fee is lower than the level allowed by law, you must honour this, although you cannot use a lower interest rate if you have a contract with public authorities. Also, if you decide to implement late payment fees, you must send a new invoice.

How to deal with late payments and unpaid invoices 

Of course, for the sake of maintaining good relationships with your customers, you may not want to implement late payment fees immediately, so what else can you do to encourage them to settle their invoices?

1. Let your customer know that you will charge late payment fees 

When you agree a contract with a client, be sure to include that you charge late payment fees, as this may be enough to encourage prompt payment. 

2. Implement a payment plan 

If payment is still delayed, speak to your client and suggest setting up a payment plan. If they are struggling temporarily, this will help them to get back on track by enabling them to make payments over time rather than having to find the total amount quickly. A payment plan should outline the minimum income required and any interest rate charged for the outstanding balance.

3. Offer an extension for first-time late payments 

If a customer usually pays on time, it may not make sense to immediately hit them with a late payment fee if they miss one due date. In this case, consider offering them extended payment terms, say 60, 90 or 120 days, to give them more time to pay or provide a one-month extension. This will help to ensure you maintain the relationship and may well build loyalty if the customer is going through unexpected financial challenges.

What do I do if my customer doesn't pay their invoice? 

If you've tried all of the above and there's still no sign of payment, there are other steps you can take. The key thing is to ensure you maintain lines of communication with the client and put everything in writing in case the situation needs to be escalated. Email or post a late payment letter to the client to remind them that payment is overdue and ask them to confirm when the payment will be made. If this doesn't garner a response, a more firm follow-up clearly stating your payment terms, the law around late payments and cut-off date for payment is a helpful next step. This could be followed by a final letter highlighting any consequences of failing to pay, such as your debt recovery arrangements or planned legal action.

If the client is still refusing to pay, it may be time to start court proceedings against them, although be aware there are costs associated with this, and there are still no guarantees you'll get paid. If you're owed less than £10,000, you would take your client to the small claims court; up to £25,000, you'd be dealt with by the county court; and any more than this, you'd be in the High Court. If your claim is successful, the client will be ordered to pay up within a month. If they don't, you can enforce the judgement, for example, by asking the court to send bailiffs to collect the money.

Read more in our guide – What to do if your client doesn't pay.

Invoice management tips

Of course, most businesses would prefer to avoid getting into this situation in the first place, and good invoice management can be the way to do this. Here are a few top tips.

1. Automate your invoicing

If your invoices are received promptly and have all the correct information, they'll likely be settled in good time. By utilising accounting software and automating the invoicing process, invoices will be sent out quickly, saving time and effort on your part. You could even set up a recurring sales invoice for regular clients.  

2. Track unpaid invoices

Once you've sent out an invoice, you must have a system in place for tracking which ones have been paid and which ones are outstanding. Again, accounting software can be a huge help here. AccountsPortal, for example, has features designed to ensure invoices are tracked from issue to settlement, and, as you can track all outstanding invoices from one dashboard, you won't forget about any that haven't been paid.  

3. Send payment reminders

Payment reminders can be a great way to encourage payment in a more friendly manner than a late payment letter. If you have a particularly troublesome client, you could start these the week before payment is due to remind them that the deadline is fast approaching. A simple email will do the job but be sure to include up-to-date, accurate information, including the amount due, ways to pay and contact should there be any issues.   

4. Make payment easy

Offering multiple ways to pay – and making it as easy as possible – is a simple way of reducing the chances of suffering late payments. Make sure you accept all major debit and credit cards, electronic fund transfers, third-party payment systems and wire transfers. Again, accounting software can make this easy. With AccountsPortal, you can even add a payment button for credit/debit cards and PayPal to invoices, making it easy for a customer to pay.  

5. Offer prompt payment discounts

A final option would be offering prompt payment discounts to clients. This doesn't need to be much – say 1-2% of the outstanding amount in exchange for paying within a shorter timeframe – but it can encourage quick payment and reduce the tracking and chasing you'll need to do.