Late fees - what are late fees?
Late fees are an extra amount charged for payment on a bill that is made after the due date
Overdue payments from customers? Add a late fee directly to your invoice to send with a reminder letter, directly in Debitoor invoicing & accounting software. Try it free for 7 days.
Late fees act as a form of compensation for the seller. Because the customer did not pay for the products/service within the specified payment period, the seller charges an added fee as both penalisation and compensation for the late payment and 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. As a default, in the UK the standard payment terms are 30 days from the date the invoice is issued. So if an invoice is issued on January 1st, and payment is not 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 their 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 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 have set out clear guidelines for what can be claimed when payment is late. In a business-to-business transaction, charging a late fee involves ‘statutory interest’, which is comprised of two different amounts:
- 8% of the total due
- The Bank of England base rate for B2B sales
However, these are only the guidelines if different late fee rates have been specified at any point during the sale.
Adding late fees to your invoices
If you work with online invoicing software like Debitoor, it’s easy to keep track of overdue payments on invoices, send reminders, as well as add a late fee if your customer has failed to provide payment for an invoice.
If a payment is late on your Debitoor invoice, you’ll find an option to add a late fee to the invoice of the amount of your choice. You can then resend the invoice directly to the customer with the updated total including the late fee.