We recently sat down with Liz Barclay, co-founder and chair of Business 111 and the UK's Small Business Commissioner until 2025, and Sam Jennings, Adfin's co-founder and CPO, with Veronika from our team hosting. We talked about why so few businesses charge late fees, what's set to change in the law, and what happens when they do. Here are the key insights from the conversation.
In short
- UK businesses already have a legal right to charge interest and compensation on late payments from other businesses, but very few use it.
- The main barriers are worry about the client relationship and the time it takes to calculate and chase the fees by hand.
- Proposed legislation would add statutory interest to overdue invoices automatically and cap payment terms, though the detail was still being debated at the time of the webinar.
- Adfin customers who switched on late fees saw clients who'd typically paid 25 days late start paying within a day on average.
You already have the right to charge late fees
If a business customer pays you late, you can already charge statutory interest and a fixed compensation fee. It's a legal right, not something that needs to be in your terms, and it's been available since 1998.
What is statutory late payment interest?
Under the Late Payment of Commercial Debts (Interest) Act 1998, a business can charge interest on a late invoice to another business at 8% above the Bank of England base rate, plus a fixed sum of £40, £70 or £100 depending on the invoice value. It doesn't apply to invoices sent to individuals.
Interest starts adding up from the day after the payment is due. If no payment terms were agreed at all, the default is 30 days, which a lot of businesses don't realise.
Why so few businesses use it
The biggest reason is the relationship. Small and micro businesses want the next piece of work, so even when they've been paid late, they often don't chase the interest, and sometimes don't chase the payment at all.
Time is the other reason. Working out the interest by hand is fiddly, especially if the base rate changed while the invoice was overdue, because each rate applies to a different part of the period. Across hundreds of conversations with businesses over the past year, the Adfin team found only five or six that had actually charged late fees. Plenty liked the idea, but the admin made it not worth the effort.
What's set to change
The commercial payments bill going through Parliament at the time of the webinar would change how this works. As proposed, statutory interest would be added to any overdue payment automatically, so there'd be no separate calculation or invoice. Customers would no longer be able to write a lower interest rate into their contracts, and payment terms would be capped, with 60 days the maximum under discussion.
What is the Small Business Commissioner?
It's a government body that helps small businesses get paid on time, including chasing late payments on their behalf when they're owed money by larger businesses.
The Small Business Commissioner would also get new powers to pursue unpaid interest and fine persistent late payers. None of this is final until the bill receives Royal Assent, and the detail, including whether the cap should be 30, 45 or 60 days, was still being debated.
Why charging late fees by hand rarely works
The manual process is slow and easy to get wrong. You calculate the interest with an online calculator or a spreadsheet, raise a second invoice in your accounting software, then send both with a total that's only correct for that day, because interest keeps adding up.
Often the customer then pays the original invoice and ignores the second one. You're left deciding whether £100 or £150 is worth chasing, and most businesses write it off and void the invoice. If it's partly paid, there's a single payment to split across two invoices.
Unpaid interest doesn't always disappear, either. Liz has seen administrators handling an insolvency go back six years to claim interest the failed business was owed, and the late payers receiving those bills ending up close to insolvency themselves.
Automating takes the work and the awkwardness out
With late fees switched on in an Adfin collection agent, the interest and compensation are calculated automatically when an invoice goes overdue, and recalculated every day. The fee details are included in every reminder, and the payment link updates to include them, so it's hard for the client to pay the invoice without the fee.
When the client pays, Adfin creates an invoice for the late fee, pushes it to your accounting software and matches the payment to it, so reconciliation is handled too. Reminders about late fees can come from Adfin in your branding instead of from the person who manages the relationship, which puts a bit of distance between you and the fee.
What is a grace period?
It's a short window after an invoice falls due during which the client can still pay without the late fee being added. In Adfin, any fee that has built up is waived if they pay within it.
Many businesses start with a grace period of five or seven days. The fee often ends up waived, but the invoice gets paid much sooner than it would have otherwise.
"If you insert a third party into the process and that third party says, look, the invoice is overdue and you owe, it is much more likely to get action."
Liz Barclay, Business 111
What happens when businesses switch late fees on
Three patterns have shown up among Adfin customers. Many start with old debt from clients they've already stopped working with. Interest is back-calculated for invoices that are already overdue, and some invoices that had been chased for months were paid after a single reminder mentioning the fee.
Others use late fees for a small group of active clients who pay late every time. Before late fees, those clients paid 25 days late on average. Once the fees were switched on, it dropped to less than a day. The fixed £40 compensation that applies from the first day late seems to be what prompts most of them to pay.
And once businesses see that it works without damaging the relationship, they tend to use late fees more widely.
Clear payment terms prevent disputes
Disputes about whether a payment is late often start with nothing being agreed in writing. A customer says they agreed 60 days, the supplier thought it was 30, or the terms were buried in a contract nobody reread.
Reminders before the due date help a lot. If a client has had several emails saying an invoice is due in 30 days, it's hard to claim on the day that 60 was agreed. Liz also suggests checking in about a fortnight before the due date to ask whether they have everything they need and whether the invoice is correct.
Paying on time is good for the customer too
Liz's closing point was about culture. A larger business that pays its suppliers on time keeps its supply chain healthy, and suppliers that are confident about their cash flow can invest in a better product or service.
"It's about partnership. It isn't just about payments."
Liz Barclay, Business 111
A few things you could try
- Check which of your clients are businesses, since statutory interest only applies to business-to-business invoices.
- Make sure every client has payment terms agreed in writing.
- Send reminders before the due date, not just after it.
- Pick a small group of clients who consistently pay late and try late fees with a grace period.
- If you have old overdue invoices, consider adding them with late fees applied.
Common questions
Can I charge interest on a late invoice?
Yes, if the invoice is to another business. You can charge 8% above the Bank of England base rate from the day after the due date, plus fixed compensation of £40, £70 or £100 depending on the invoice value.
What are the payment terms if none were agreed?
The default under UK late payment law is 30 days. Interest can be charged from the day after that if the invoice is still unpaid.
Will charging late fees damage client relationships?
It's a common worry, but Adfin customers who've tried it tend to expand their use once they see the results. A grace period and reminders sent from a system, not the relationship owner, both help.
What is the new late payment legislation?
The bill would add statutory interest to overdue invoices automatically, stop contracts setting a lower rate, cap payment terms and give the Small Business Commissioner powers to fine persistent late payers. The detail was still being debated at the time of the webinar.
.avif)
.avif)
