Chasing late payments is a real pain, and a frustrating drain on your time and energy. That said, it’s crucial for protecting cash flow and keeping your business operating.
We’re all human, and we all make honest mistakes, so the occassional overdue invoice may simply be the result of an innocent oversight. However, as a freelancer, it’s vital to keep the money rolling, and follow up every missing payment.
We’ve put together a list of late payment fee FAQs, and how they can benefit freelance professionals.
What are late payment fees?
Late payment fees have been around since the late eighties, as part of The Late Payment of Commercial Debt (Interest) Act (1988). They are not compulsory, but are generally thought to be good practice.
The Act was amended in 2002 to include fixed late payment penalties alongside interest claims. These fees are a way for freelancers and companies to reduce the financial impact late-paying customers have on a business.
How much should I charge in late payment fees?
Under late payment legislation, you can charge penalties as a fixed sum, as well as statutory interest of 8%, plus the Bank of England base rate.
These fixed late payment sums vary on a sliding scale, depending on how much the customer owes.
|The amount of debt||Fixed penalty|
|£999.99 or less||£40|
|From £1,000 to £9,999.99||£70|
|Debts of £10,000 or more||£100|
It’s worth noting that you can only charge the business once for each late payment.
The official gov.uk website has a formula to help you calculate penalties and statutory interest.
When do late payment fees apply?
When you create a customer contract, it’s up to both parties to decide on reasonable payment terms. These might mean you ask for payment up front, or set a payment deadline.
Most freelancers put 30 day payment terms on their invoices. It means that your client is contractually bound to provide you with payment within 30 days of receiving their invoice.
If the agreed period of time passes without payment, the invoice becomes late (overdue) with immediate effect. So, if payment is due by the 7th of the month, it becomes a late payment from the 8th of that month.
What if we don’t agree a payment date first?
Don’t worry if you didn’t explicitly agree a payment date with the client. Legally, a payment becomes late 30 days after the customer receives their invoice, or you deliver the service, whichever is later.
You can claim statutory interest on late payments for up to six years in England, Wales or Northern Ireland. It’s five years if you’re in Scotland. That’s a long wait for payment though, so it’s usually more efficient to stay on top of that invoicing.
How do I charge late payment fees?
If a client doesn’t pay you, and the payment deadline passes, you can charge late payment fees by issuing another invoice.
This isn’t an amendment to the original unpaid invoice, and instead shows the details of the late payment penalty. It should also refer to the original invoice.
Do I need to tell my clients that I issue late payment fees?
You aren’t legally obliged to warn customers in advance if it’s your policy to issue late payment penalties. For the sake of a maintaining a working relationship with them, it might be useful to mention it though.
Government advice suggests that invoices (including those you issue before late payments occurring) show the below text somewhere on the document:
“We/I understand and will exercise our/my statutory right to interest and compensation for debt recovery costs under the late payment legislation if we/I are/am not paid according to agreed credit terms.”
If you do find yourself approaching a payment deadline without hearing from the customer, it’s always worth sending a gentle reminder.
Get in touch the week before the payment deadline, and remind them that the cut-off is looming, as well as mentioning late payment fees. It’s generally useful to word these early reminders on the basis that the customer has genuinely forgotten to pay you.
What if my client doesn’t pay the late payment fees either?
The late payment legislation aims to prevent businesses from putting loopholes into their contracts. If you do find yourself facing further issues, approach a representative body about challenging this on your behalf. Be aware that this might result in the issue going to court, so consider it a last resort where possible.