Can I Charge Interest on Late Invoice Payments?

Late payments are a common problem for businesses. When a customer fails to pay an invoice on time, it can quickly affect your cash flow and create financial pressure. For many businesses, especially a small or growing company, even a single overdue invoice can cause difficulties.

The good news is that in many cases you may be able to charge interest when a customer pays late. UK law allows businesses to claim interest on late payments and certain recovery costs when dealing with unpaid commercial invoices.

Understanding when and how you can claim interest can help protect your business and encourage customers to pay invoices on time.

When an Invoice Becomes Overdue

An invoice becomes overdue when the customer fails to pay by the agreed payment date.

Most businesses set clear payment terms when they issue an invoice. Many companies use standard payment terms of 30 days, although some agreements allow longer periods such as 60 days.

If the invoice remains unpaid after the payment date, it is considered an overdue invoice. At this stage, businesses may begin chasing payment and may also be entitled to claim statutory interest depending on the circumstances.

Late payments can occur even when a business has correctly supplied goods or completed work. For example, if you deliver the goods or provide the service as agreed, the customer is still expected to pay within the agreed payment period.

The Late Payment of Commercial Debts Legislation

The right to claim interest on late payments comes from the Late Payment of Commercial Debts (Interest) Act 1998.

This law applies to many business-to-business transactions and is designed to protect businesses when dealing with late payments.

Under the payment of commercial debts legislation, businesses may be able to:

• Charge interest on overdue invoices
• Claim statutory interest on late payments
• Recover certain debt recovery costs

This legislation is particularly important for smaller companies that may struggle when customers delay payments.

How Much Interest Can You Charge?

Under the commercial debts interest act, businesses may charge statutory interest on unpaid invoices.

The statutory interest rate is normally 8% above the Bank of England base rate.

This means the interest rate is calculated using the Bank of England base rate at the time the invoice becomes overdue.

For example, if the England base rate is 5%, the statutory interest rate for late payment would normally be 13%.

Interest usually begins from the day after the agreed payment date until the invoice is paid.

This means that if a customer fails to pay after 30 days, interest may begin to accrue from the following day unless the contract states otherwise.

Fixed Compensation for Late Payments

In addition to interest, businesses may also be able to claim fixed compensation for late payments.

This compensation is designed to help cover debt recovery costs when businesses have to spend time and resources chasing unpaid invoices.

The amount of compensation depends on the value of the debt. For example:

• £40 for debts up to £999.99
• £70 for debts between 1,000 and £9,999.99
• £100 for debts above £10,000

This means a business dealing with an unpaid commercial debt may claim both statutory interest and compensation to help cover the costs of recovering the money owed.

What If Payment Terms Are Longer?

Some contracts allow longer payment terms than the typical 30 days.

In some industries, payment periods of 60 days or longer may be agreed. In these situations, the invoice only becomes overdue after the agreed payment period has passed.

Once the invoice is overdue, the creditor may still be able to claim statutory interest under the payment of commercial debts legislation.

However, it is always important to check the contract or agreement to confirm the agreed payment terms before charging interest.

Can Interest Encourage Faster Payment?

Charging interest on late payments can encourage customers to pay more quickly.

When customers know that interest may apply to an overdue invoice, they are often more likely to settle the invoice promptly.

In many cases, simply explaining that interest may apply under the commercial debts interest act can prompt payment.

For businesses that regularly deal with late payments, including clear payment terms in invoices and contracts can reduce disputes and make recovery easier.

When Debt Recovery May Be Necessary

Sometimes customers still fail to pay invoices even after reminders and interest notices.

If an invoice remains unpaid, businesses may need to consider debt recovery options.

This might involve:

• Sending formal payment reminders
• Issuing a letter before action
• Instructing a debt collection agency
• Taking legal action to recover the commercial debt

Professional recovery services can often help businesses recover unpaid invoices while allowing the business owner to focus on daily operations.

The Role of the Small Business Commissioner

The Small Business Commissioner provides guidance and support for businesses dealing with late payments.

This service helps smaller companies understand their rights and encourages fair payment practices between businesses.

The Commissioner may also provide advice on handling late payment disputes and improving payment behaviour in commercial relationships.

Taking Action on Late Payments

Late payments can have a serious impact on business finances. When an invoice becomes overdue, it is important to act quickly and follow a clear recovery process.

If you have supplied goods or provide the service and the customer has not paid by the agreed payment date, you may have the right to charge interest under the commercial debts interest act.

You may also be able to claim statutory interest and compensation to help cover debt recovery costs.

Taking early action when dealing with an overdue invoice helps protect your cash flow and increases the chances of recovering the money owed.

How can Expert Commercial Law assist?

If a customer fails to pay an overdue invoice, it can take time and effort to chase payment. For many businesses, especially a small business, dealing with unpaid invoices can also affect cash flow and daily operations.

Expert Commercial Law helps businesses understand their options when dealing with late payments and commercial debt. We are not a law firm or a debt collection agency, but we work with professionals who specialise in debt recovery and commercial disputes.

Depending on your situation, we may be able to refer your enquiry to suitable recovery professionals who can assist with recovering debts, sending formal letters, or advising on the next steps if the invoice remains unpaid.

In some cases, recovery can begin at a pre-legal stage through structured communication with the debtor. If payment is still not made, it may become necessary to consider further steps such as instructing a debt collection agency or taking legal action.

Taking early action can help you recover unpaid invoices, protect your cash flow, and resolve disputes more quickly. If you would like to discuss your situation, Expert Commercial Law can help you find the most appropriate support for dealing with late payments.