Late fees - What are late fees?

Late fees are an extra amount charged for payment on a bill that’s made after the due date.

Learn more about managing overdue invoices with invoicing software. 

Late fees act as a form of compensation for the seller. Because the customer didn’t pay for the products/services within the specified payment period, the seller charges an added fee as both penalisation and compensation for the late payment and the impact on the seller’s cash flow.

Typically, late fees are a percentage of the total amount owed. There are some regulations when it comes to charging late fees depending on the location of your business. For example in the UK, HMRC clearly defines late payments, what to do about them, and what happens if they aren’t paid.

When to charge a late fee

A payment is officially considered late if it occurs after the due date specified on an invoice. In the UK, the standard payment terms are 30 days from the date the invoice is issued. 

For example, if an invoice is issued on January 1st, and payment isn’t received by January 31st, late fees can be applied as soon as the following day.

However, payment terms can cover a variety of ranges. A business can set its own payment terms, for example, specifying that payment is expected within 60 days (longer than the default payment period). This is usually specified before the sale is completed.

A business can also offer early payment incentives such as cash discounts to discourage late payment and help customers avoid late fees.

The Late Payments of Commercial Debts (Interest) Act of 1988

In the UK, this act set about the parameters for SMEs to charge late fees for late payment on a sale to larger businesses. The Late Payment of Commercial Debt Regulations of 2013 updated the act.

It deals with three main areas involving late payment and the impact on a business: the interest charged on late payments, compensation for late payment recovery, and reasonable cost reimbursement. There is a 6 year limit to claiming late payments from customers.

Late fees can be charged as soon as the payment is late according to the specified payment terms. Unless otherwise stated, the default payment period is 30 days. This can be either after the customer receives the invoice or after they receive the goods/service.

Rules for charging late fees

For SMEs in the UK, HMRC has set out clear guidelines for what can be claimed when payment is late. In a business-to-business (B2B) transaction, charging a late fee involves ‘statutory interest’, which is comprised of two different amounts:

However, these are only the guidelines and you can set a lower rate if you’d like. 

Adding late fees to your invoices

If you work with online invoicing software like SumUp Invoices, it’s easy to keep track of overdue payments on invoices and add a late fee if your customer has failed to provide payment for an invoice.

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