Summary
- Xero has no late fee feature. You cannot set up a late fee policy in Xero. Instead, keep your policy separate and apply the rules manually.
- Having multiple policies covers your bases. You can set up one policy for long-standing customers and another for serial late payers.
- Treasure by Trove handles one policy, free. You set your own or use statutory rates, then calculate against any invoice. Running a second policy needs Trove.
- In Trove the late fee policy is set per workflow. Two policies means two workflows, and customers are enrolled in whichever one fits.
- The line is usually drawn on relationship age or payment behaviour, not sector. How long they’ve been a customer predicts their reaction better than what they do.
- A third group that never gets charged is normal. Setting it up explicitly is safer than remembering to exclude people by hand.
Xero lacks late fee functionality
Xero has no native late payment fee functionality and so you cannot set up an automatic late payment policy. The workaround, which we cover in how to add late payment fees to invoices in Xero, is to work out the late fee yourself and raise it as a separate no-VAT invoice.
Working out the fee is the most manual part. Free late payment fee software covers what a free calculator can do to help with the maths, even without a policy layer behind it.
Why multiple late fee policies are helpful
If you design your late fee policy with your best customers in mind, it might become too lenient. If you design for that one chronic late payer, you risk upsetting the rest of your customers. To get around this issue, set up more than one late fee policy.
This does add complexity to the process of raising late fees, so only go down this route if it’s something you feel strongly that you need.
How to decide which accounts get which late fees
Here are a few ways to decide how to apply late fees:
| Split on | Works when | Watch out for |
|---|---|---|
| Length of relationship | Older accounts have earned different treatment and everyone internally agrees on that | Nobody actually knows how old some accounts are |
| Payment behaviour | You have enough history to see who’s habitually late rather than occasionally late | One bad quarter puts a good customer in the wrong group |
| Contract or invoice size | Large balances justify a firmer policy and the maths supports the effort | A small customer who never pays still needs chasing |
| Agreed payment terms | Some customers genuinely have 30-day month-end terms and are not late at all | Terms that were agreed verbally and never written down |
| Who owns the relationship | Account managers or partners have context you don’t | Turns into a veto on chasing anyone |
An example of having two late fee policies
Here is how you could split your customer base and apply different late fee policies to each.
| Standard | Long-standing accounts | |
|---|---|---|
| Applies to | Customers under two years, and anyone with a pattern of late payment | Accounts over two years |
| Fee raised at | 14 days past due | 45 days past due |
| Statutory interest | Yes, 8% over base | Yes, 8% over base |
| Compensation fee | Yes | Yes |
| Where it appears | On the monthly statement | On the monthly statement |
| Default if they pay | Charged | Waived |
The two policies differ in two ways: when you start communicating about the fee and what happens if the customer pays.
- Beginning comms at 45 days rather than 14 gives a long-standing account the benefit of the doubt for longer without exempting them.
- Waiving the fee if the long-standing account pays also protects that relationship while charging the fee for other accounts helps ensure they won’t make it a habit.
Setting up separate late fee policies
If you only need one policy, Treasure by Trove does it for free. You set your own late fee policy or use the statutory rates, then calculate the fee against any invoice by uploading the original invoice or keying in the details. Finally, connect Xero if you want the fee raised there.
A second policy needs one of Trove’s paid plans. On these plans, you can build the two workflows, set a policy on each, and enrol customers into whichever one applies.
Enrolment can be manual on a customer-by-customer basis, or driven by a filter such as when they became a customer in Xero. Sending different reminders to different customers covers how that filtering works in more detail.
The fees themselves then appear on each customer’s statement, calculated at the point of sending. Showing late payment interest on a statement covers what the customer actually receives.
Frequently asked questions
Can I charge different interest rates to different customers? You can, but there’s rarely a reason to do so. Statutory interest is a fixed entitlement at 8% above base rate. Charging one customer less can just complicate your own records. Vary the timing instead.
Is it legal to charge one customer interest and not another? Yes. Statutory interest is a right you can exercise or not, invoice by invoice. Nothing obliges you to apply it consistently.
What if a customer finds out another gets softer terms? It’s unlikely to come up but if it does, just answer honestly. Using the example in this article, most people will find it reasonable that an account you have a long-standing relationship with gets more time before late fees apply.
How many policies is too many? Two covers almost every business we see. It keeps complexity as low as possible while giving yourself a bit more flexibility.
Getting started
The full guide to late payment fees in the UK covers what you can charge and the contract wording to support it, which is worth settling before you design any policy at all.
Treasure is a free late payment fee calculator that connects to Xero and will run a single policy for you. For two policies applied automatically across your ledger, Trove runs a free 30-day trial or you can book a demo to talk through how to split your own customers first.
