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An Expert Guide for Adding Interest to Overdue Invoices UK

Adding Interest to Overdue Invoices UK

An Expert Guide for Adding Interest to Overdue Invoices UK

Overdue invoices and clients that pay late are some of the most common problems businesses in the UK face every day.

For example, in September of 2021, it was reported that there was an 11% increase in overdue payments in a year.

Credit control teams in businesses across the country spend countless hours are chasing unpaid invoices. This all comes at a cost, and companies spend more than they need to on tasks like this.

Managing and resolving unpaid invoices in the right way is crucial to any businesses success. Cash flow issues must be avoided at all costs, and understanding what your rights are regarding late payments can be very useful.

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When does an Outstanding Payment Become an Overdue Invoice?

When you first issue an invoice, the amount you are owed is considered as an “outstanding payment”. This means that the money is owed to you, but is not due yet.

Most UK businesses operate on payment terms of 30 days. This means that most payments will be made within 30 days of receiving an invoice. Larger companies might operate on terms of 60 days, with some even going as high as 90.

There is often some confusion with this, despite payment dates clearly being indicated on most invoices that are sent. This is even more true for clients that are based in another country, where their business practices might be completely different to those in the UK.

If a client fails to pay on or before the due date on the invoice, their payment becomes “overdue”. This is a problem for your business, and without swift action, you risk jeopardising your cash flow.

There are several steps that you could take at this point. These include chasing the debtor for payment or sending reminders. One popular method of cracking down on overdue invoices is to apply a daily interest charge to them.

Charging Interest on Overdue Invoices UK

Charging Interest on Overdue Invoices UK

Adding interest to overdue invoices is a very effective way of encouraging clients to pay their bills on time. Some business owners, especially those in newer or small businesses, are sometimes hesitant to apply a charge like this. However, it is a completely normal part of accounting, and without it, there are few reasons to pay on time.

Many businesses apply their own rate of interest on late payments, with standard rates set by them. If your business does not have this, the Late Payment of Commercial Debts (Interest) Act of 1998 set by the government can serve as a guide.

This applies to businesses that provide goods or services, but do not have their own process for interest and compensation on unpaid invoices.

The government have a guide for interest on late commercial payments that explains what you can charge another business. In this example, an 8% charge plus the Bank of England base rate is applied on business to business transactions.

It is important to note that you cannot claim this rate of interest if there is already another rate in an existing contract.

Ensuring Clients Pay on Time

Although there is no requirement to inform your clients that this interest rate will be applied, it is better to do so in advance.

As well as keeping your client informed and reducing the risk of any customer service issues, they will be aware of the charge and therefore more likely to wish to avoid it.

It is better to clearly state any and all additional charges that can be incurred in advance. A good way to do this is by stating them on any invoices you issue, or by asking your clients to agree to your payment terms.

What to do if Adding Interest to Overdue Invoices Doesn’t Work

In some cases, a debtor will take every step possible to avoid paying what they owe. The increasing daily interest rates on your invoices may not be enough to motivate them into paying.

Obviously, this cannot be allowed to continue, and your money must be recovered.

Federal Management regularly speaks with companies that have done all of the appropriate steps in advance. Later, they are challenged by a client that won’t pay under any circumstances.

In this case, the debt enforcement options available to individual businesses are limited, and a professional solution is required.

Debt recovery costs must be factored into any decision you make, but the most effective and economical option is to instruct a professional debt collection agency.

Whilst an individual business may have few debt enforcement options, an agency will have a proven history of effective debt recovery cases.

Federal Management specialist in the collection of commercial debt. If your business is struggling to recover money owed from overdue invoices, speak to one of our advisors now.

Adding Interest to Overdue Invoices UK | Get immediate help from our Experts

If you need help with the Recovery of Debt, our friendly team of Debt Collection Experts is happy to help you today,

SPEAK TO A DEBT COLLECTION EXPERT