Paying late can cause problems with cash flow and could increase the risk that you won’t be paid at all. Making use of your legal right to demand interest from late paying customers can motivate customers to make timely payments.
The lawful right to interest and compensation applies in all contract. It is up to you to decide whether you will enforce your rights and if so how.
- It is the right of the lender to charge interest
Every business is guaranteed the power to charge interest for late payments
The right is applicable to sales to business as well as public sector clients.
The right of a consumer does not apply to sales to consumers.
You are able to negotiate your own contract instead
The contract must contain a’substantial remedy’ should the customer pays late.
The customer can’t impose unjust terms: for example, the contractual payment period is usually set at 60 days.
Public sector customers must pay within 30 days , and interest for late payments cannot be lower than the maximum statutory amount.
In the absence of specific payment terms the right of the law will apply.
The charge for interest begins at the expiration of the agreed credit period
If you have not agreed credit terms, normally a payment is late within 30 days.
What does it mean?
According to the law, finance directors aren’t able to obtain additional credit from suppliers in order to increase their cashflow by paying off invoices after the deadline.
There’s less free credit to be had just by paying it off slowly
The “base rate plus 8” formula means money ‘borrowed’ through delaying payments is more expensive than cash from the bank.
- The interest rate
The law provides you with the right to charge interest at the Bank of England base rate plus 8.8%.
For example, if the base rate is 0.5%, you could be able to charge interest of 8.5%.
Rates for calculating interest are fixed for six-month periods
The base rate at 31 December is utilized for debts becoming late between the 1st of January and 30th of June. The rate in effect on June 30 is utilized from 1 July through 31 December.
You can also get reasonable debt recovery fees
You can claim £40 on debts that are less than £1,000, £70 on debts that fall between £10,000 and £1,000 and £100 for debts of greater than £10,000.
If your expenses are greater than this (for example, if you use a debt collection agency) you may be able to claim reasonable cost of recovery.
You are only able to claim these expenses if you are claiming the interest payable under the Act. If you do not declare interest or are claiming it under a contractual provision or the provisions of a different Act You are not able to be able to claim the costs.
- Should you charge interest?
While the interest rate is high however, the total amount of funds involved could only be a few dollars. Imagine how charges for interest and costs can impact your relationships with your customers.
Think about how your customers are likely to react
Find out if late payments are restricted to a small number of your customers, or if a majority of your customers have to pay late.
Request employees on the front line (eg those in the sales department) to share their thoughts.
Evaluate the effectiveness of your credit control system
If you are ineffective at collecting money owed to you clients, they may be strongly opposed to being asked to pay interest or debt-recovery costs.
Check to see if you’re using an accounting system for credit that is appropriate to your business needs.
See what companies in your industry are doing
Your trade association could be able to give assistance.
Ask your clients if other suppliers charge interest on late payments.
It is not compulsory to charge interest or debt-recovery costs.
You have the option to establish the terms of your agreement.
- When is a payment late?
Under normal circumstances you’ll have negotiated with your customer on the date when payment should be made. The maximum contractual payment period that can be agreed is usually 60 days.
A payment is late If it is due after the day that ends the credit term agreed upon.
Agreements may be verbal or written. Verbal agreements are difficult to prove.
If there’s no agreement on a credit period, the law establishes a default period of 30 days
You are allowed to charge interest for up to 30 days after you delivered the item or rendered the service, or 30 days after you notified the purchaser of the amount of debt, whichever is the later.
To inform the buyer of the amount of due amount, it is best to issue an invoice. However, any other method of notification will suffice like a telephone call, though it could take a while to verify in the case of an eventual dispute.
The payment terms of standard practice could have been established
This is considered to be the credit period in non-existence of any additional agreement.
For example, if a buyer typically pays you on the last Friday of the month after the month that you send your invoice, that’s when the credit period comes to an end.
The specific language of your agreement will determine when interest is allowed to begin
If you’ve agreed on part payments triggered by the finalization of a particular portion of the project – for instance, completing the foundations of a structure the interest will begin on the day that you’ve reached the milestone.
This is not the same as an advance as well as an installment (which is not linked to a particular date). Interest starts on these the day after the goods are delivered or when the entire job has been finished.
- Calculating the interest
The process of calculating the interest due is a straightforward, step-by-step process.
Calculate the interest
Multiply the debt amount by the interest rate (base rate plus 8.8%). For instance, if debt is £1,000 and the base rate 4.5% is 4.5%, then the interest will be £1,000 + 12.5 percent. This is £125.
Find the interest rate for each day by dividing the annual interest by the number of days in 365.
Calculate the due amount by increasing the daily interest rate by the number of days in late. For instance, if the £1,000 debt was settled 30 days behind, you can charge 34p for 30 days = £10.27.
A portion of the payment is usually used to reduce the amount of interest owed at first
In this case, for example, if you received a payment of $1,000 in relation to the £1,010.27 which is currently due the balance due is £10.27 from the initial amount due. The interest on the £10.27 will continue to accrue.
This is not the case if you have agreed otherwise to your client.
The amount of outstanding varies on a daily basis
Be practical, as payer or payee about paying the credit.
As an example, it is agreed that If the debt is paid within a week, no interest will be due. For help on what to charge use a late payment interest calculator.
Your VAT position isn’t affected
You are charged interest on the quantity of the loan (including any VAT element) but you don’t have to pay any VAT for this interest.
Also, you do not have to pay VAT on any debt recovery costs you are claiming.
- How do I make an application for interest
If you choose to charge interest for late payments, you need to include it as part of your routine credit control system.
Even if your company does not want to collect interest, highlight those rights on your ‘terms and condition statement. This could encourage customers to pay on time.
Be sure to notify each customer in writing
Indicate that you will charge interest for late payments, as you are allowed to charge by law.
Contact habitual late payers to examine how this system might affect them. Explain that their late payments cost you money.
It is important that your customers know and accept your payment terms
Inscrive the payment date you agreed upon on all invoices.
The invoice should clearly define the terms and conditions you have agreed to, and you will make use of your right to charge interest on late payments.
Inform customers when interest begins to build up
Please provide the following details:
the invoice number from the initial invoice;
which account the bill is the purpose of the bill;
the amount due;
the extra amount of interest the customer will owe you each day;
To whom the payment must be to;
Give the customer the final bill when all the money has been paid
The final bill should include the days of interest calculated and the base rate utilized in calculating the interest.
The clock ticks .
Interest claims on late payments do not need to be submitted immediately.
A supplier has six years from which to file a claim
The terms of trading must be set out and the client notified when interest began to accumulate.
The six-year period for claims is the same across England, Wales and Northern Ireland, but the period is five years only in Scotland.
Companies may make claims after having stopped supplying a customer
The only way for purchasers to ensure they are not subject to any future lawsuits is to pay bills promptly.
Receivers and liquidators acting in connection with a business may also pursue former customers to collect interest on late payments which can extend back to six years.
- What if a customer objects?
Even though it is against laws, you customer might not want to make a payment for interest on a late payments, but they are not able to opt out of paying interest. To protect the relationship between you and your customer, look for other methods of getting your cash before taking legal actions.
Let it be clear that you’d rather reach an agreement on the outstanding debt
If you’re unable to come to an agreement with your client, you can follow several ways to collect the money.
Consider applying pressure by placing the customer on a stop list
You cease making any further sales towards the client until debt is paid.
You might consider selling or giving the debt (or the portion of it) to a third party
For example, you might use a debt collection agency.
The buyer of the debt is able to use the courts to obtain payment of the debt and the interest.
If you decide to transfer or sell a debt, you are required to notify the customer in writing that it was assigned to a third-party.
You may decide to make your claim known to the court
The claim can be made If you are able to provide written evidence that you delivered your goods or completed the joband the customer was happy.
If you have legal expense insurance, this should encourage a non-payer to pay up when they’re threatened with legal action.
- Additional assistance
Additional information on how to claim and paying interest on overdue invoices can be obtained from several sources.
The Small Business Commissioner
If you’re experiencing problems with customers who are late in paying and are having trouble getting them to pay, you can contact the small Business Commissioner. They provide a free service to assist you with setting up efficient credit control in the first place and follow up with any customers who are delaying payments that are required to be paid. Their interest calculator can be helpful as well.
The body, which is independent and public, was created to address issues with late payments in UK.
Your financial advisor or accountant
They should have an understanding of the legislation and how it will impact your company.
Your local business support group or trade association
If you’re an established small or medium-sized company with at least 250 employees, your business association , such as the Federation of Small Businesses or the Forum of Private Business – may be able to go to court on your behalf to contest unfair contract terms.