Statutory Late Payment Interest: What UK SMEs Can Claim, and Why Many Use Invoice Finance Instead

UK law lets businesses charge 8% above the Bank of England base rate on overdue commercial invoices, currently 11.75%, plus a fixed compensation fee. Few SMEs actually claim it. This guide explains the right, how to calculate it, and why invoice finance often solves the underlying cash flow problem faster than pursuing a claim.

What the Late Payment of Commercial Debts Act Actually Allows

The Late Payment of Commercial Debts (Interest) Act 1998 gives any UK business the automatic right to charge statutory interest on invoices paid late by another business, without needing it written into a contract. It applies to business-to-business trade only, not consumer sales.

The rate is fixed by law at 8% above the Bank of England base rate, which stands at 3.75% following the last change on 18 December 2025, giving a current statutory rate of 11.75% a year. Alongside interest, the creditor can add fixed compensation of £40 to £100 depending on the debt size, and can recover reasonable debt recovery costs above that if they exceed the fixed sum.

How the Statutory Interest Rate Is Calculated

Statutory interest accrues daily from the day after the agreed payment date, or 30 days after delivery or invoicing if no date was agreed, until the invoice is paid in full. The calculation is simple: invoice value multiplied by 11.75%, divided by 365, multiplied by the number of days overdue.

A £20,000 invoice paid 45 days late would accrue roughly £289 in statutory interest before compensation is added. On a single invoice this looks marginal. Applied across dozens of overdue invoices from slow-paying clients over a year, it becomes a meaningful sum, and a legitimate one to invoice for separately once the underlying debt is settled.

Why Most UK SMEs Never Claim It

Surveys by bodies including the Federation of Small Businesses have repeatedly found that most SMEs entitled to statutory interest never invoice for it, mainly out of concern it will damage a client relationship they depend on for repeat work.

That concern is understandable but often overstated for larger corporate buyers, who build late payment interest into their own accounts payable expectations. The bigger practical barrier is administrative: tracking exact payment dates against invoice terms across a full customer ledger takes time most finance teams in small businesses do not have, so the right lapses by default rather than by decision.

The Relationship Between Late Payment Claims and Invoice Finance

Invoice finance and statutory interest claims address the same root problem, slow-paying customers, but from opposite directions: one recovers a cost after the fact, the other removes the cash flow gap before it bites. Most invoice finance clients still choose not to charge statutory interest even after funding the invoice, to preserve the buyer relationship the finance itself depends on.

Where the two work together is evidence. A ledger showing consistently late payment from a named buyer, tracked because a factoring or discounting facility monitors collections closely, is exactly the record needed to decide whether that buyer's payment terms should change, whether interest should be charged, or whether the customer should be dropped from the facility altogether.

Practical Steps to Charging Statutory Interest

Charging statutory interest works best as a deliberate, applied-consistently policy rather than an occasional threat used only against the most frustrating clients, since selective enforcement can look retaliatory if challenged.

Start by confirming payment terms are stated clearly on every invoice and contract, since ambiguity gives a paying customer room to dispute the trigger date. Calculate interest and compensation using the current statutory rate at the time payment fell due, not the rate on the day of calculation, since base rate changes shift the figure. Invoice for it separately from the original debt, with the calculation shown, and be prepared that some customers will query or negotiate it.

When Invoice Finance Is the Better Fix Than Chasing Interest

Statutory interest compensates for slow payment after it happens; it does nothing for a business that needs to make payroll or pay a supplier this week. Where the immediate problem is cash flow rather than lost income, invoice finance addresses it directly by advancing a percentage of invoice value, typically 80% to 90%, within a day or two of invoicing.

Factoring also shifts the administrative burden of chasing payment to the finance provider, whose credit control team is often more consistent at enforcing terms than an internal accounts team stretched across other priorities. For persistent late payers, that consistency frequently improves payment timing more than the threat of interest does.

Common Mistakes SMEs Make With Late Payment Terms

The most common mistake is leaving payment terms undefined or vague on contracts and invoices, which removes the clear trigger date the statutory interest calculation depends on and weakens any later claim.

A second is applying interest inconsistently, charging it against a small supplier while waiving it for a large corporate account with the same lateness, which undermines its credibility if ever tested. A third is confusing statutory interest with contractual late fees; if a contract sets its own late payment interest rate, that rate applies instead of the statutory one, so contract terms should be checked before assuming the statutory rate governs.

How to Decide Which Route Fits Your Business

The right choice depends on whether the business's problem is cash timing, income recovery, or both, and each needs a different response rather than a single fix applied everywhere.

A business with a small number of large, otherwise reliable customers who occasionally pay late may find charging statutory interest sufficient discipline on its own. A business with many customers on structurally long or unpredictable terms, where cash flow gaps recur every month regardless of any one customer's behaviour, is usually better served by invoice finance, with statutory interest reserved as a secondary tool against the worst repeat offenders.

Step by step

1. Check the contract or purchase order for an agreed payment term; if none is stated, the statutory default is 30 days after delivery or invoicing.
2. Record the exact date each invoice becomes overdue and track it against the date payment is actually received.
3. Calculate interest at 8% above the Bank of England base rate in force when the debt became overdue, applied daily to the outstanding invoice value.
4. Add the fixed statutory compensation, £40 for debts under £1,000, £70 up to £10,000, £100 above that.
5. Issue a separate, clearly itemised invoice for the interest and compensation once the original debt is settled.
6. Apply the policy consistently across all customers rather than selectively against the ones causing the most frustration.

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