Many businesses lose out because they don't know, or don't understand, their statutory right to charge interest if debts are paid late.
Your entitlement
Encourage early payment, and improve your cashflow, by using your statutory right to claim interest for late payment of debts. It's a good idea to include a statement on order forms, applications for credit, confirmations of an order, invoices and contracts, making it clear you will exercise this right if payment is not made on time.
Late payment means...
A payment is late if either the payment period agreed with the debtor or, if there is none, the 'default period', has run out.
A payment period can be specifically 'agreed' in writing or orally (it doesn't matter which, as long as you can prove what was agreed). Or it might be 'agreed' because a standard practice has developed with a customer, eg that they pay your invoices at the end of the month in which they are delivered. In either case, a payment becomes 'late' the day after it should have been paid.
If there isn't an agreed payment period, a payment is late once the 'default period' has run out, ie if it has not been paid within 30 days after either:
whichever is later. In all cases, you calculate interest from the day after the period for payment runs out.
Payment by instalments and payments 'up front'
If your contract says payment will be by instalments, you can claim statutory interest separately on each instalment paid late.
If you have agreed that a payment be made 'up front', before you have delivered your goods or service, statutory interest on that payment runs from when all the goods are delivered or the whole service is performed.
How to claim interest
As soon as payment is late, send your debtor a written notice that you are going to claim interest under the Late Payment of Commercial Debts (Interest) Act 1998. Include the same information you provide on your invoices - and specify the interest owed to date, and the ongoing daily rate, to concentrate their mind:
What you can claim
You can claim the Bank of England base rate, plus a statutory rate that changes every six months. Use the base rate in force at the end of the day:
On which the contract says that payment is to be made; or
If the contract does not stipulate a date for payment, at the end of the last day of the default period.
It doesn't matter if the base rate has changed between that day and the time you are eventually paid.
The base rate is published in The Financial Times - or use a statutory interest calculator like the one on the Better Payment Group website. You can also find historical rates there.
You can also charge a fixed sum to compensate you for costs of collecting the debt (the Late Payment of Commercial Debts Regulations 2002):
- £40, for a debt less than £1,000;
- £70, for a debt of £1,000 or more but less than £10,000;
- £100, for a debt of £10,000 or more.
Case by case
Charging interest isn't compulsory. Consider carefully whether you will claim interest from all customers - but letting a customer get away with late payment rarely helps your business relationship, as it can lead to a lack of respect for your service generally. We can help you make that judgement.
Contractual interest
Rather than claim statutory interest, you could put a contractual right to interest in your trading terms. If you do, and the interest you claim is substantial, the contractual rates apply instead. But beware the rights of consumers - there are limits on the contractual interest you can charge.
If in doubt, take legal advice.
