Charging Interest on Late Bills
Cash is king. If you do have unpaid bills, remember that it is your money your customers are holding onto. But did you realize that you have a legal right to charge interest on unpaid bills for business clients?
This statutory right applies only to business-to-business transactions (and to public authorities), and does not apply where the customer is a private individual acting as a consumer.
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Why charging interest on a late bill is so powerful
Charging interest is a very powerful weapon in any credit control armoury – but it’s amazing how few businesses use it properly. In particular, it produces two big dividends:
- As your clients see their bill gradually mounting, it is a strong incentive to pay.
- If your clients do delay paying, then at least you get some return on the hit to your cashflow.
Your legal right to charge interest
Under the Late Payment of Commercial Debts (Interest) Act 1998, a statutory right to interest is automatically implied into contracts for the supply of goods or services between businesses, unless the contract expressly provides for a different interest rate. The statutory rate is 8% above the Bank of England Base Rate. If you choose to set your own contractual rate of interest, the statutory rate will not apply. Care should be taken to ensure that any contractual rate is reasonable, as an excessive rate may be challenged in court.
Fixed compensation for late payment
In addition to interest, the Act also entitles you to claim a fixed sum as compensation for each late invoice:
• £40 for debts up to £999.99
• £70 for debts between £1,000 and £9,999.99
• £100 for debts of £10,000 or more
This compensation is payable per invoice and can be claimed even where the interest amount is relatively small. Where your reasonable debt recovery costs exceed the fixed sum, you may also be able to recover the additional costs.
What is the rate of interest?
The statutory interest rate is set by reference to the Bank of England base rate in force on either 30 June or 31 December each year. Where the debt becomes overdue between 1 July and 31 December, the applicable base rate is that in force on the preceding 30 June. Where the debt becomes overdue between 1 January and 30 June, the applicable base rate is that in force on the preceding 31 December.
When is the debt overdue?
In most cases, statutory interest can be charged from 30 days after the later of:
• the date goods or services were supplied; or
• the date the customer received your invoice.
You may shorten this period by including a clear clause in your terms and conditions stating that interest becomes payable earlier, for example from the date of the invoice.
How to calculate your interest on a late bill
This is straightforward. If, for example, you invoiced £100, the invoice fell due on 30 September, and payment was 50 days late:
• Applicable base rate (30 June preceding the overdue period): 2%
• Statutory interest rate: 2% + 8% = 10%
• Annual interest on £100: £10
• Daily interest: £10 ÷ 365 = £0.027
• Interest due for 50 days: £1.37
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One last practical tip
Even where you do not intend to pursue interest or compensation in full, clearly stating that interest and statutory compensation are accruing often prompts payment without further action
