Most types of invoices can be divided into two broad categories; paid and unpaid invoices. In business transactions, paid invoices are those that the client pays on time.
Unfortunately, however, there is a significant majority of invoices that belong to the other category as well. Many times, you might refrain from reporting late invoices to remain shielded from time-consuming legal proceedings.
These unpaid invoices fail to be paid on time by the client. Their due date has long expired and thus, interest can be charged against them.
The interest rate for late payment of invoices is the same across all unpaid transactions between businesses. However, business dealings bound by a contract that mentions a pre-decided interest rate have to follow it.
The interest rate on unpaid business transactions varies depending on whether the invoice belongs to a B2B transaction or a B2C transaction. A B2B transaction refers to a “business to business” transaction. This is the category you are concerned with. The B2B invoice is issued from one business to another asking for payments to be made.
The business size can range from a well-established company to a sole-trader. The interest calculations and details mentioned below are regarding all types of B2B business dealings. The interest charged on B2B late invoices is decided by the Late Payment of Commercial Debts (Interest) Act of 1998 and the EU’s Directive.
On the other hand, B2C transactions are those that take place from business to consumer. Online websites such as Amazon can be used as an example to understand B2C transactions.
There is no legal requirement of charging interest on late payments on the invoices of this type of transaction. However, if a business wishes to charge interest to the consumer, it must clearly communicate the intention to do so through the payment terms.