When and how to add late payment interest to your invoices

Since the economic crash of 2008/9, late payment of freelancer invoices by businesses has become a scourge of the freelance sector.

According to the Federation of Small Businesses (FSB), it is estimated that 50,000 business fold each year due to cashflow problems caused by late payments. Gov.uk also highlighted that there was £23.4 billion worth of late payments currently owed to small businesses in the UK in 2020.

When does a payment become late?

You can claim interest and debt recovery costs if another business is late paying for goods or services. If you agree a payment date, it is usually within 30 days for a public authority or 60 days for a business transaction. You can agree longer than 60 days, but it must be fair to both businesses.

If you do not agree a payment date, the law states that payments are late 30 days after:

1. The customer gets the invoice.
2. You deliver the goods or provide the service.

How can you ensure you’re paid on time?

The best way to ensure you are paid on time is to set your terms and expectations at the outset and agree them with your client, and one point you need to clarify from the outset is that you charge interest on late payments.

It is important to ensure your clients are aware of this, so they are not unpleasantly surprised when they see it in writing for the first time.

What interest can you charge on late payments?

The interest you can charge if another business is late paying for goods or services is “statutory interest”. Statutory Interest is 8% plus the Bank of England base rate for business-to-business (B2B) transactions. You will need to send a new invoice to your client if you decide to add interest to the money you are owed.

Note: you cannot claim interest if there is a different rate of interest within a contract. Also, you cannot use a lower interest rate if you have a contract with public authorities¹.

Example:

If your business is owed £1,000 and the Bank of England base rate is 0.5%:

• The annual statutory interest on this would be £85.00 (£1,000 x 0.85 = £85.00)
• Divide £85 by 365 to get the daily interest: 23p per day (£85 / 365 = £0.23)
• After 50 days this would total £11.50 (50 x £0.23 = £11.50)

You are also entitled to charge a business a fixed sum for the cost of recovering a late commercial payment on top of claiming interest for it, with the amount you can charge depending on the size of the debt. You can only charge a business once for each payment.

If you have been forced to charge late payment interest on your invoices, but still have not received payment, then you might consider further action. Taking legal action of any kind can be expensive and, in many cases, it is seen as the last resort. Ask yourself if taking legal action is worthwhile and if the size of the debt justifies this course of action.

How insurance protection can help reduce the burden of legal costs

Legal action can be expensive and if the thought of handling a Small Claims Court petition fills you with concern, it may be wise to ensure you are covered by Legal Expenses Insurance. This freelance insurance policy includes legal assistance to help recover unpaid invoices.

With Legal Expenses Insurance, you have the backing of an entire legal team and the policy provides cover up to £100,000 for ‘any one claim’ to cover the costs incurred by a legal proceeding.

How can you access further legal resources and guidance?

The Markel Law Hub is an online resource containing a range of documents and articles to help you manage the various laws you can encounter when running a business.

The Law Hub currently helps over 50,000 users and contains:

• 800+ legal resources including contracts, policies, forms, and letter templates from Markel’s expert solicitors²
• Legal updates, templates, guidance documents, checklists, and useful links
• 460+ straight-forward guides²
• 350+ links to key resources²
• Up-to-date information on new legislation and case-law
• Live Chat available Monday to Friday 09:00 – 17:00
• Legal helpline

There are two ways you can access the Markel Law Hub.

1. Simply purchase a Legal Expenses Insurance policy from us with prices starting from £75.00, which we think is a small price to pay, it only takes a few minutes via our online system.

2. If you do not require Legal Expenses Insurance but feel that you would benefit from access to the Law Hub, you can purchase an annual subscription for £189.00 +VAT. Click to the Markel Law Hub here for details.

If you are interested in our Legal Expenses Insurance policy, click the green button below to get a quick online quotation or call us on 0333 321 1403.

CLICK HERE TO BUY LEGAL EXPENSES INSURANCE ONLINE

Sources:

1. www.gov.uk/late-commercial-payments-interest-debt-recovery/

2. https://www.markellaw.co.uk/lawhub

www.gov.uk/government/news/government-tackles-late-payments-to-small -firms-to-protect-jobs

www.gov.uk/late-commercial-payments-interest-debt-recovery/print

Related Articles:

Click here to discover steps freelancers can take to deal with late payments

Why you should include milestone payments in your freelance contracts

The extra value you will discover in our Legal Expenses Insurance

Author Phil Ainley, Marketing Manager