What You Didn’t Know About Late Payment Fees

If you do business on trade credit, you have probably seen the following statistics before and the chances are good that you are affected by late paying customers. It is estimated that late payments to SMEs now top £26 billion and an astonishing 25% of small businesses are on the verge of bankruptcy. To remedy this dire state of affairs, the government appointed a Small Business Commissioner in July of this year to tackle the culture of late payment on invoices. While this will be welcomed by SMEs, what is often overlooked by the media and many business owners is that the government has already introduced a bill to alleviate some of the pain of chasing your clients.

Since March 2013, you are entitled to charge statutory late fees and obtain reimbursement for your company for the reasonable recovery costs of the debt, if you do not get paid for goods and services on time (60 days for business and 30 days for public authorities). You should note that there is no requirement to state this in your terms and conditions. You don’t even have to mention it on your invoices.

You are entitled to charge a statutory fee of 8.0% above the Bank of England’s base rate. As at November 2015, this meant that you could charge 8.5% p.a. on overdue amounts. This is probably higher than you might have considered charging your customers for the aggravation of chasing payments. You should note that there is no maximum to the amount you can recover for collecting your money if your collection costs exceed the statutory late payment fee and compensation rate.

The table below details the reasonable recovery costs you can charge your customers:

Table

 

 

For example, if you had to escalate collection issues to a professional debt collection agency or to a law firm, costs might be considerably higher than the statutory late fees and compensation rate. Under these circumstances, you are entitled to claim the recovery costs from your debtors. This is an important detail that many businesses overlook.

With this in mind, you might be tempted to start charging late fees across all your debtors but you should exercise caution as it might sour your relationship with your customer. It is important to ask yourself if it’s worth doing business with a company that consistently pays you late. In such circumstances, you are effectively giving them an interest-free loan.

Instead of charging late fees automatically, we recommend that you use them as a warning to make your invoice reminders more impactful. For example, if they haven’t paid your invoices for 30-45 days beyond the due date, you could consider adding some warning of future additional costs, giving them a deadline of 5-7 days. Make sure you mention the late fees and compensation rate that you will charge if the payment has not been received by a certain date.

Automated credit control solution Satago gives you the possibility of calculating late fees for all outstanding invoices and adding late fees to your invoice reminder templates. This means that with Satago, you don’t need to calculate late fees for your debtors and draft invoice reminders manually.

Call us on 01752 752210 to learn more about how you can leverage technology to chase your debtors more efficiently and how you could set-up statutory late fees to end late payments and take control of your cashflow.

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