Does Charging Interest On Late Payments Work?

Does Charging Interest On Late Payments Work?

Preventing debt is one of the best ways of maintaining a stable cash flow in a business. Setting up a robust payment terms document at the beginning of any agreement can help to set the expectations of all parties, as long as everything is explained clearly.

In a perfect world, this would be enough, and all clients would pay as expected on the payment date. Unfortunately, it is no secret that there are always those clients that try withholding payment regardless of the best-laid plans.

When this happens, a common way to handle the matter is by adding late payment interest charges onto invoices that miss the due date. The effects of late payment can be minimised with this.

If implemented correctly, this can be an effective countermeasure, as this works as an incentive for ensuring all clients pay on time.

We asked our debt collection experts how charging interest on late payments works, and what the alternatives were for cases where it is not effective.

Does Charging Interest On Late Payments Work?

Our team of Debt Collection Experts are happy to help with your enquiries.

Can I Charge Interest on Late Payments?

Many businesses are unsure if they can charge late payment interest on commercial debt. For those that are in doubt, the British government has a very clear explanation on the subject on their website.

Businesses can claim interest on late or unpaid invoices and use this base rate as a guide. The base rate has the following example:

“If your business were owed £1,000 and the Bank of England base rate were 0.5%:

  • the annual statutory interest on this would be £85 (1,000 x 0.085 = £85)
  • divide £85 by 365 to get the daily interest: 23p a day (85 / 365 = 0.23)
  • after 50 days this would be £11.50 (50 x 0.23 = 11.50)”

It is common for businesses to include this as a clause in their terms and conditions, as in some cases it helps to prevent late payments.

Unfortunately, this does not work in all cases, and regardless of what the rate of interest is, many debtors will try to avoid paying no matter what.

Can I Charge Interest on Late Payments?

Recovering Debt

Despite the best preventative measures, there will always be a need for a debt collection process to be prepared in every business. Non-payment of commercial debts is something every business owner is familiar with.

Historically it has been common for companies to take legal action against their debtors. This involves going through the court system in order to resolve the matter. However, this can often be too expensive, a factor that often results in the debt being written off.

For businesses today, professional debt recovery agencies are often sought after as a solution to the issue of commercial debt. A commercial debt collection agency can provide a low cost and effective service.

The UK Debt Collection Bureau’s members are all award-winning and accredited agencies that have a proven track record of success.

For more information on how our partners can help your company to recover its debts, speak with one of our friendly experts today.

Does Charging Interest On Late Payments Work?

Our team of Debt Collection Experts are happy to help with your enquiries.

Charging Interest on Late Payments – Frequently Asked Questions

Is There a Standard Rate For Charging Interest on Late Commercial Payments in the UK?

In the UK, the bank of England base rate can apply to late payments should the creditor wish to use them. You should make this clear to the debtor when sending invoices.

If a Debtor Ignores My Payment Reminders, What Can I Do?

If you have applied late payment charges to an invoice and contacted the debtor but they are still refusing to pay, it is best to hire the services of a professional. Chasing the debt alone is still an option, but a professional debt collector can use their expertise to recover the owed money quickly and at a low cost.

Is there a Guide for Sending a Debt Reminder Letter?

Many professional debt collectors can help you to write a good payment reminder. Federal Management, the UK’s leading commercial debt collection agency, has written a debt collection letter template.

Can a Small Business Charge Interest on Late Payments?

Yes, businesses of any size can charge interest on late payments, providing that they follow the proper guideline outlined by the bank of England.

How Much Does it Cost to Recovery a Debt?

Each case of debt collection is unique and must be priced according to its own circumstances. For a cost estimate, speak to one of our award-winning partners today for a free pre-action assessment.

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