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Late Commercial Payments – Charging Interest and Debt Recovery

As any business owner knows, maintaining a steady cashflow is vital for business health, especially in the case of small to medium sized businesses (SMBs).  Here in the UK, our economy depends heavily on SMBs as they comprise more than 99% of all private sector businesses and employ a massive 16.3 million people, 60% of private sector employment.  In fact, the combined annual turnover of SMBs in the UK was £2 trillion last year.

Whilst it’s relatively easy to stay in control of your own business’s financial obligations, spending, etc., keeping on top of your customers and their payment processes is nigh on impossible.  This can present challenges to SMB owners as they need this steady cashflow process to thrive and survive.  However, many SMB owners face the problem of late payments from customers and clients, which can have a negative effect on business unless the problem is addressed and overcome. 

When it comes to late paying commercial customers, did you know that you can claim interest and debt recovery costs if another business is late paying for the goods and services you provide for them? 

If you agree a payment schedule with commercial customers, it must be within 30 days for public authorities, or 50 days for business transactions.  However, you can agree on a longer period than 60 days for business transactions, but this must be fair for both businesses.  If you don’t agree a payment date, according to UK law, the payment is considered “late” 30 days after either:

  • You deliver the goods or provide the service
  • The customer receives the invoice.

Once the payment becomes late, you are entitled to charge what is known as “statutory interest”.  Statutory interest is 8% of the invoice sum, plus the Bank of England’s base rate for business to business transactions.  You cannot claim statutory interest if there is a different rate of interest in any contract you have entered into with the customer and you cannot use a lower interest rate if you have a contract with public authorities.

For example, if your business is owed £1,000 and the Bank of England base rate is 0.5%, the annual statutory interest on this sum would be £85 (1,000 x 0.085).  To get the daily interest figure, divide £85 by 365 (£0.23).  This means that you can charge £0.23 for each day that the payment is overdue – after 10 days this would be £2.30.  You should then send a new invoice with the interest added to the money you are owed.

You can also charge a business a fixed amount for the cost or recovering a late commercial payment – this is on top of the interest charged on the payment.  The sum you are allowed to charge depends on the amount of the debt and you can only charge a business once for each payment.  The amount you are allowed to charge is set by late payment legislation and is as follows:

Amount of Debt

Amount you can Charge

Up to £999.99

£40

£1,000 - £9,999.99

£70

£10,000 and over

£100