Why You Should Be Charging Late Fees

Managing a steady cashflow is never easy.

With so many business attributes in abundance – it’s essential to have some sort of leverage to ensure your business gets paid.

… and to deter would be non-payers.

Here are 5 key reasons why the Late Payment of Commercial Debts and Interest Act 1998 (UK only) – ( The Act ) are crucial in getting your business debts paid.

… and when and how you should use it.

1) Working Capital

Many business owners think that generating Sales is enough to promote the overturn in your Balance Sheet credentials.

However, by introducing this into your business credit policy, it not only gives your business an extra shift in getting paid on time, but enables you to generate extra income into your business.

2) A criteria of fixed fee late payments

Depending on the number of Invoices that you have outstanding, the Act enables you to manifest the following charges to each Invoice that is outstanding:

– up to £999.99- you have the right to charge £40.

– from £1,000 – £9,999.99 – the Act enables you to charge £70

– over £10,000 – the threshold for charging increases to £100.

So, just to clarify the point here – this enables you to charge a Late Payment Fee per Invoice and not just based on your overall debt.

3) The right to charge interest on all Invoices.

You have the right to charge interest on each and every late Invoice that is due.

This effectively is determining the date on which your invoice became due and then based on the number of days that your invoices have been outstanding, you would multiply this at a rate of 8.75% (at the time of writing.)

Fortunately, it’s not something that I have plucked from thin air, but the Interest is charged at 8% over Bank of England base rate, which is currently at 0.75%.

Now this may not seem a lot, but remember when interest rates were at 5.75% in 2007, or when the Act was introduced around 1998, base rate’s were tracking at around 7.25%, the Interest rates are a substantial deterrent for any of your riskiest Customers.

4) The right to recover reasonable Court Costs

The double edged sword described in Points 2 and 3 should be enough to deter your late payers, but depending on your current business bad debt ledger, this alone may not be sufficient.

To add weight to financial injury to your debtors, the last benefit is a amendment to the Act from March 2013, provided that this is not included in your standard payment terms and conditions , the Act enables any business that is owed money to charge reasonable debt recovery and enforcement costs.

Please bear in mind that the Recovery Costs that one can charge would need to be reasonable so as to pinpoint the overall costs incurred in issuing legal action for the entire debt that is due from the Customer.

5) Credit/Invoice Policy Amendment

Last, but not least as this is enacted by Parliament, the discretion is yours to apply this to your credit policy.

It is there to protect you and your cashflow if you are not getting paid on time. Whether you decide to quote this on your payment terms of business, and/or on your Invoices and (SOA’s) Statement Of Accounts is not mandatory, but advisory – as making your Customers have a right to know as a further deterrent to their paying late.

It may be covered under your indemnity clause in your contract, but still this argument could be raised at a later date which could be best avoided, if you want to avoid spiralling costs.

However, as a general guideline you should, in your initial contract, place a clause to be indemnified of all costs, including Debt Recovery and Court Costs.

It is no longer mandatory, so cannot be argued in Court as an express term of your Contract, as opposed to that of an implied term that is standard and that as a business owner, you are now able to rely on this act, if you do wish to pursue legal action against your end user/debtor.

Adding this strengthens your Balance Sheet

Policy additions increase your cashflow


Calculating Late Payment Fees and Interest

a) Do we calculate using working days or every day?

Calculations include weekends and bank holidays too.

E.g standard Invoices are payable usually after 30 days if a standard process is not available.

b) Do I risk loosing my Customers?

Not at all. But if your Cash Position is venturing on desperation, then it may be beneficial to start charging all Customers the process introduced under the Act, depending on the value of your Invoices are outstanding over two months and/or more depending on your business or internal credit policy.

As explained above, it is purely advisory, rather than mandatory and you would not risk loosing key Customers.

c) Where do I get a better understanding of this?

If you have an Accountant or Business Coach and/or Mentor then it is worthwhile speaking to them directly. Similarly, your Industry governing body may or may not be able to advise you further.

They will be able to advise you better if this is something that you can or cannot apply to your outstanding Invoices.

d) What if I want to do my own research

Have a look at the following links to gain a better understanding:



If you would like assistance in getting this set up into your normal ledger, then please do not hesitate to contact and we can discuss this further:

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