Invoicing clients and customers is one of the most time-consuming administration tasks most business owners will do. In fact, small business owners can spend up to 10 percent of their time creating, sending and chasing invoices. Nevertheless, invoicing is an essential part of running a business and it must be done in a timely manner to keep a regular stream of income flowing in.
There are some circumstances when you may wish to include additional fees to cover the time taken to create the invoice, or interest charges to apply to late payments. The truth is that you are free to do both, as long as you do so in the right way.
Choosing to add an administration fee to an invoice really does depend on whether you view invoicing as billable or non-billable time. You may accept that time spent invoicing is a simple cost of doing business, in which case, no fees will apply. On the other hand, you might consider the creation of the invoice as part of client work, and bill for it. This is more likely to be the case if you draw up particularly lengthy or time-consuming invoices for certain clients, for instance, if they want their invoice to be itemised.
You are completely within your rights to add an administration fee to your invoice. Details of the administration fee should be included in your payment terms and conditions. You should detail the level of fee that applies, and when it is applicable i.e. you may charge an administration fee for certain payment types.
You should also discuss your payment terms upfront before you get started on any new client work. Explaining the inclusion of an administration fee upfront will remove any confusion down the line and set the client’s expectations about what the payment process will be.
Interest on late payments
If a client doesn’t want to pay on time, there’s not all that much you can do to make them. However, if you have set your payment terms out clearly on your invoice and the client chooses to ignore them, you are entitled to charge interest on the debt in the form of overdue fees.
If you haven’t agreed when the invoice will be paid, the law says that the payment is late 30 days after:
- The customer receives the invoice; or
- The goods or services are provided.
The statutory right to claim interest on late payments is not compulsory, so it is down to each business owner to decide if this is the route they wish to take. If you do, you should explain to clients that interest will be charged on late payments before you start the work. This should also be clearly set out in your payment terms and conditions, along with the rate of interest you will apply.
How much interest can you charge?
On business-to-business transactions, simple (not compound) interest can be applied at a rate of 8 percent plus the Bank of England base rate for the period. However, you cannot claim this rate if there is a different rate of interest stipulated in your payment terms and conditions. If you are invoicing a public authority, you must apply the statutory rate of 8 percent.
Debt recovery costs
You are also entitled to charge a business a fixed sum for the costs associated with recovering a late commercial payment. This is in addition to the interest charged on the late payment. The first part element of this compensation is fixed:
- Up to £999.99 – a £40 charge
- £1,000 to £9,999.99 – a £70 charge
- £10,000 or more – a £100 charge
You can also claim ‘reasonable costs’ associated with recovering the late payment if it exceeds the fixed sum above. For example, if you go to a private debt collection agency, you can use their service to recover the debt at no additional cost to your business.