One of the most common questions we hear in our KoffeeKlatch customer support group is: “How do I decide on interest rates for late payments?” Some people think you’re stuck with the statutory interest rate, others have no idea what rate to charge, and a few believe there’s one magic number that is the only one they can use.
Understanding Interest Rates for Late Payments
If you’re dealing with consumers (B2C), you can’t charge statutory interest . That rate is really just for businesses charging businesses (B2B). When working with consumers, you need to pick an interest rate that isn’t so high it feels like a penalty, yet it still compensates you for the hassle of waiting for your money. The key is to avoid setting a rate that could be seen as an “unfair contract term.” As long as your rate isn’t unreasonable, you’re free to choose what works best for you.
If your B2C ts and cs don’t say anything about late payment and interest, then you can’t charge any.
If you’re working with the public sector, things get a bit trickier. You can get the higher amount of your contractual interest rate or the statutory interest rate. Public sector clients have their own ways of stretching out payment terms, so if that’s giving you headaches, you know where to find us in the KoffeeKlatch customer support group.
For B2B arrangements, the decision really comes down to what’s right for your business. And yes, that means getting a little familiar with those percentages and the math we all mostly tried to forget in school. But don’t worry—we’re here to help you navigate that so you can choose an interest rate that balances fairness with financial sense.At the end of the day, whether you’re a sole trader, part of a business partnership, or working in a public sector role, the goal is to find a rate that reflects the cost of waiting for payment without crossing the line into excessive penalty.
The Basics of Interest Calculation
If you were like me you didn’t enjoy percentages and compound interest at school, but long years of being a business owner and getting my money in have taught me that these concepts on types of interest are worth coming to grips with. This is all about your money after all!
Ordinary Simple Interest
Monthly Compound Interest – Interest on Interest
With simple interest (SM), you add a fixed percentage of the original debt each period without accounting for any interest that has already accumulated. For example, using a 10% rate on a £500 invoice means you add a set amount of £50 every month. The longer the money is owed, the more times £50 is added to the total.
Monthly compound (CM) interest means that each month you calculate 10% not only on your original £500 but also on any interest that has already accumulated. This “interest on interest” effect makes the debt grow faster over time compared to simple interest. The later you are paid the more interest is charged on a larger sum. CM
| Days | 10% SM | 10% CM | 10% CD | 15% OD CD | SI 13.%pa DC |
| 30 | £550.00 | £550.00 | £552.45 | £503.75 | £505.20 |
| 60 | £600.00 | £605.00 | £610.40 | £511.50 | £510.45 |
| 90 | £650.00 | £665.50 | £674.50 | £517.50 | £315.75 |
| 120 | £700.00 | £732.05 | £745.20 | £523.50 | £521.15 |
| 365 | £1,108.33 | £1,594.00 | £1,683.00 | £575.00 | £567.50 |
SM=Simple Monthly, CM=Compound Monthly CD=Compound Daily OD=Average Unauthorised Overdraft Interest rate taken at 23.02.2025, SI=Statutory Interest calculated at 23.02.2025 base rate. Rates may vary. These rates are not recommendations but illustration.
Daily Compound Interest – Calculated Every Day
Overdraft and Statutory Interest
(Daily compound interest (CD) takes it a step further by calculating interest every day. Although we simplify this by assuming each month has 30 days for our examples, in reality the actual number of days in your billing cycle would be used. Daily compounding results in a slightly higher total than monthly compounding because interest is applied more frequently. Again, the longer the money is owed, the more you notice the difference. If you look at what happens if someone takes a year to pay you it is a big difference.
One way of looking at what to charge is what you would be charged for an unauthorised overdraft (OD) – ignoring the increased bank charges at this stage. At say, 15% per annum (calculated daily), you can see what it costs you to borrow that money over the same period of time.
If you are thinking of charging statutory interest (SI) (for example, a base rate plus 8% equaling around 13.5% per annum), the interest adds up more slowly.
When can you start charging interest
If you don’t set a payment date in your ts and cs, then late payment interest starts on the due date set in the invoice or the date the services were provided if this is later than the invoice.
You need to decide your payment terms too!
It’s your choice and it’s your business
You might have found all this interest rate mumbo-jumbo a bit boring back in school, but when it’s your money on the line, you quickly discover a real interest!
As a business owner, you have a crucial decision to make about which rate to charge for late payments. It can be tempting to ask around what everyone else is doing—but be careful. If your peers only know about statutory interest, they’ll likely tell you to stick with that, even if it isn’t the best option for you. And if they aren’t too comfortable with percentages, they might just repeat a rate that was set during a period of different inflation, which may not be right for today.
Take the time to understand your options, look at the figures, and choose a rate that truly reflects the cost of waiting for your money—without venturing into excessive penalties. With a little bit of number crunching, you can use interest on late payments to help keep your cash flow on track and your business running smoothly. And then just set the rate you decide in your KoffeeKlatch contract Booking form.
