How to apply late fees to invoices
Late payments can greatly disrupt a business’ cash flow. Invoices are a legal document, so it's important to clearly state your payment terms and late fees on invoices to avoid these unfortunate situations.
This article explains how to apply late fees to your B2B and B2C invoices, and the maximum amounts you can charge. A sample invoice containing payment terms and late fees is also provided.Start invoicing for free
Your invoices should always include a clear due date. If a due date is not specified, then the invoice must be paid within 30 days (60 days for business transactions) from the invoice issue date according to UK law.
However, the due date doesn’t have to be 30 days, you can set specific payment terms for each sale or customer. This may be 7 days, 14 days, or whatever you think would be best for your business.
Invoicing software can help you keep track of your invoice status and follow up with any overdue payments.
You can set your own late payment fees as long as they are within your legal rights. You want to charge enough so that the customer will act, but not too much that it makes your business seem greedy or is over the legal limit.
In the UK, you can apply interest as a late fee for business-to-business sales. This is called ‘Statutory Interest’ and is charged at 8% of the invoice total plus the Bank of England base rate.
For instance, let’s say your B2B invoice is for £10,000 and the Bank of England base rate is 0.5%. You can charge 8.5% annual statutory interest. Therefore, your late fees would be:
Annual statutory interest: £10,000 x 0.085 = £850
Daily interest: £850 ÷ 365 days = £2.32 per day
Therefore, if the payment is 30 days late, you could charge: £2.32 x 30 days = £69.60
In addition to statutory interest, you can also charge a debt recovery fee which is set by the government. The amount you can charge is based on the amount you’re owed:
Up to £999.99 = maximum of £40
£999.99 to £9,999.99 = maximum of £70
Over £10,000 = maximum of £100
In the UK, there are no legal guidelines for charging late fees for business-to-consumer transactions. If you want to charge late payment fees, you certainly can. However, these need to be clearly stated on the invoice so the customer is aware of them and encouraged to pay on time.
Your late fees should also be fair. In most cases, they are expressed as a small percentage of the invoice total (less than 10%), but you are also able to charge a fixed amount as an administrative fee.
If the payment is late and you did not specify any late fees on the original invoice, you can send a new invoice with the late fees included. However, it is recommended that these are added to the initial invoice rather than adding them retrospectively. Although late fees are standard practice, you should consider if this will damage your relationship with the client, and apply late fees on a case by case basis for consumers.
You may also consider adding late fees to all of your invoices to avoid any misunderstandings and disputes. For B2B transactions, this is common. However, if you supply products or services to consumers, this is less common.
Late fees should be included in your payment terms. This is a section on the invoice that explains how the customer should make the payment and any other special conditions of the sale. The late fees should be easy to understand and within the legal amount.
Below, we've provided a sample invoice created with SumUp Invoices which includes detailed payment terms and late fees. The late fees are in accordance with the law, which is 8% plus the Bank of England base rate. All of the other mandatory invoice fields are also included.
Looking for a simple way to invoice your customers? SumUp Invoices is software that allows you to create invoices for free.
Our premade invoice template includes a “Terms & Conditions” section where you can enter your late fees. You have the option to save the terms as default so they will be automatically applied to all future invoices.
SumUp Invoices can also help you get paid faster by including an online payment option directly to your invoices so that your customers can pay instantly with a credit card. There's also the option to enter your bank account details on your invoices to receive bank transfers.
The software is updated regularly so you can rest assured that your invoices will always be compliant. Get started now by creating your first invoice in less than 1 minute.Start invoicing for free