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Want to know what interest you can charge on late payments when working as a freelancer, contractor, or small business owner? This article explains what the rules are, and a few ways to get your money from difficult clients.
Cash flow is a very personal issue for freelancers, contractors and small businesses, and can sometimes mean the difference between making and missing this month’s rent, or even being able to afford to eat. Your clients might not give two hoots about your financial concerns, but that doesn’t mean they don’t matter.
We’ve got an article on unpaid invoices and how to get your money, but if you’re struggling to convince your client to pay you on time, maybe a threat of late payment interest will help.
Fortunately, the EU’s Late Payments Directive gives you the power you need to take action on unpaid invoices, allowing you to include additional charges in the amount you claim back from a tardy client.
It’s best practice to agree strict payment deadlines (as well as any late payment penalties) before you begin working for a new client. However, depending on the nature of your business, you might not always do so.
It’s common practice to set the payment deadline as 30 days from the date the contract is completed (meaning the day you deliver the goods or services you were hired for), even if no payment schedule is decided upon before work begins.
That means there should be no doubt over when your invoice is due to be settled unless you agree to longer terms upfront. Regardless, there’s no reason you should be forced into accepting your client’s payment terms retrospectively if they’re too long to be practical.
There are three costs you are allowed to add to overdue invoices.
Statutory interest at 8% above the Bank of England base rate can be added onto the most recent of either December 31st or June 30th.
For example, if you’re in the first six months of the year and the base rate on December 31st was 0.1%, you can charge interest at 8.1% from the day the invoice became overdue. You’ll need to send a new invoice showing the amount you are adding.
For reference, the Bank of England base rate was reduced to 0.1% in March 2020.
Fixed fees can also be added to the total amount owed:
If the cost of chasing your payment is greater than the fixed fee you’re eligible to claim, you can also claim back the extra expense as ‘reasonable costs’, which should mean you are never left out of pocket for chasing a payment.
The fees for debt collection (a service Crunch can provide – see section below) are considered reasonable costs.
If you’re struggling with a non-paying client, download our series of late payment reminders and get that invoice paid. Choose from ‘polite nudge’, ‘firm reminder’ or ‘final notice’.
You can also contact Crunch Collections to recover unpaid invoices cost-effectively, without alienating your clients. Our standard fees for debt collection in the UK depend on how overdue your invoice is, starting from just 5%.
There are no up-front or hidden fees – you only pay once we’ve retrieved the money you’re owed.