Charging interest on late payments

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According to the Federation of Small Businesses (FSB), late payments by clients causes 50,000 small businesses to go under each year. This is estimated to cost the UK economy £2.5 billion.

For contractors and freelancers, the personal cost of late-paying clients can be more damaging than the financial cost. Worrying about cash flow and late payments is one of the main causes of stress and anxiety amongst the self-employed.

If you’re working through a recruitment agency, you’re unlikely to face the problem of late payers as the agency will have a dedicated team who chases for payment. However, if you’re working directly with clients, you’re responsible for following up with clients to get them to pay your invoice.

Invoices on a desk with calculator.

To minimise the risk of clients paying your invoice late, we suggest:

1. Setting payment terms with the client prior to working with them. It’s common practice for this to be 30 days but you are free to set your own payment terms

2. Detailing your payment terms in your contract along with what action you’ll take in the instance of late payments

3. Running a credit check (if you can) on new clients to determine the state of their cashflow

4. Using an online accounting system like FreeAgent or Xero to issue invoices

5. Setting the online accounting system to issue payment reminders

6. Taking the time to ensure your invoices contain all the information needed for it to get paid, paying attention to PO numbers

7. Getting a point of contact for someone in the Finance department

8. Being proactive in chasing up late payers – don’t take the view they’ll eventually pay it, as they may not!

If your client still fails to pay your invoice on time, under the EU’s Late Payment Directive you are entitled to charge interest and charges on the affected invoices.

How does the Late Payment Directive work?

The Late Payment Directive which was introduced in 2013 enables you as a contractor to charge interest and fees for late payment. If payment terms weren’t set, the law sets a default term of 30 days. Payment is classed as late if it is not made by this date or is made after this date.

The directive states you can charge:

· Statutory interest, at a rate of 8% above the Bank of England’s base rate. The base rate as of 31st December is used for invoices deemed as late between 1st January to 30th June. The rate as of 30th June is used for 1st July to 31st December. So, for example, if the base rate is 0.75%, you can charge interest of 8.75%

· Fixed fees based on the amount owed; £40 for debts up to £999.99, £70 for debts from £100 to £9,999.99 and £100 for debts £10,000 and above

· Additional reasonable fees, if the cost of chasing the payment is more than the fixed fees listed above

Most clients are proactive in paying invoices, but you may occasionally come across one or two who are not on the ball with payment. In this case, follow up with your contact (we find a phone call is better than email) to enquire why it is late. If payment is still not received within a reasonable time, consider reissuing the invoice to include interest and late payment fees.

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