In the event of late payments, they can cause cash flow problems and can increase the likelihood that you will not be paid at all. Making use of your legal right to recover interest from late-paying customers could encourage them to make timely payments.
The statutory right to interest and compensation applies on all contractual agreements. You must decide if you want you want to enforce your rights and, if you do, in what way.
- The right to charge interest
Every business has the legal ability to charge interest for late payment
The right applies for sales to both business and public sector customers.
The right to privacy does not apply to sales to consumers.
You are able to negotiate your own contract in lieu of negotiating
The contractual agreement must provide a ‘substantial remedy’ if the customer fails to pay.
The customer can’t impose unjust terms, such as the contractual payment period is usually capped at 60 days.
Customers in the public sector must pay within 30 days and interest for late payments cannot be less than the statutory amount.
In the absence specific payment terms in the absence of any specific payment terms, the statutory rights applies.
The rate of interest starts to be charged at the date of the agreement credit period
If you have not agreed credit terms, typically a payment is late within 30 days.
When looking for a late payment interest calculator, visit Turner Clifford…
What are the differences?
As per the law, companies’ finance directors aren’t able to obtain additional credit from suppliers to boost liquidity by paying for invoices after the date of due.
There’s less free credit to be had just with a slow payment
The ‘base rate plus 8’ formula implies that money borrowed by delaying payment is more expensive than cash from the bank.
- The interest rate
The law grants you the right to charge interest at the Bank of England base rate plus the 8% rate.
For example, if your basis rate of interest is 0.5 percent, you can apply interest rates of 8.5%.
The rates for interest calculation are fixed for six-month period
The base rate on 31 December is utilized for loans that are due between 1 January and 30 June. The rate in force on June 30 is utilized from 1 July through 31 December.
You can also be eligible to claim reasonable debt recovery costs
You are able to claim £40 for debts with less than £1,000, £70 on debts that fall between £1,000 and £10,000 and £100 for debts that are £10,000 or more.
If your expenses are more than this (for example, if you are using an agency to collect debt) you may claim’reasonable cost of recovery.
You can only claim these expenses if you are claiming interest under the Act. If you don’t make a claim to interest on the amount, nor you make it a claim under a contractual clause or the provisions of another Act You are not able to claim the cost.
- Do you need to charge interest?
While the interest rate is very high however, the total amount of the cost could be a few pounds. Consider how costing interest and charges could impact your relationships with your customers.
Consider how the customers will likely react
Determine if late payment is only limited to a few of your customers, or if the majority of your customers have to pay late.
Request employees on the front line (eg at sales) for their opinion.
Assess the effectiveness of your credit control system
If you’re not successful in recovering money due to you, customers may strongly object to being asked to pay interest and debt-recovery expenses.
You must ensure that you have a credit control system is appropriate for your business requirements.
Find out what other businesses in your field are doing
Your trade association may be able of providing guidance.
Ask your customers if other suppliers charge interest on late payments.
It isn’t mandatory to charge interest or charge debt-recovery expenses.
You retain the right to set the terms of your agreement.
- What happens if a payment is late?
In most cases, you will have agreed with your client when the payment should be made. The maximum period of payment which can be agreed upon is usually 60 days.
A payment is considered to be late if it is made within the last day of the agreed credit period
Contracts can be verbal or in writing. Verbal agreements can be difficult to prove.
If there isn’t an agreed credit period, the law sets the default period to 30 days
You are able to charge interest for 30 days after the day you handed over the goods or provided the service or after 30 days have passed since you have notified the purchaser of the amount of the due amount, whichever occurs most recent.
To inform the purchaser of the amount of the debt, you should ideally make an offer of an invoice. However, any other method of notification would do like a telephone call, though it could take a while to verify in the event of disputes.
Payment terms that are standard practice may have become established
This is regarded as the credit term in the non-existence of any additional agreement.
For example, if the buyer typically will pay you on the final Friday in the month, following the month during which you send your invoice, this is when the credit period will end.
The specific language of your agreement will determine the time at which interest may begin
If you have agreed on partial payments that will be triggered upon the finalization of a particular portion of the work – for instance, completing the foundations of a structure – interest will start running beginning the day you’ve reached the milestone.
This isn’t the same as an advance payment as well as an installment (which isn’t subject to a milestone). The interest rate on these loans begins on the day the items are delivered or when the entire task has been completed.
- Calculating the interest
Calculating the interest due is an easy, step-by step process.
Calculate the interest
Multiply the amount due by the rate of interest (base rate plus 8percent). For example, if the debt is £1,000 and the base rate is 4.5%, then the interest would be £1,000 multiplied by 12.5 percent = £125.
Estimate the rate of daily interest using subdividing the annual interest by the number of years.
Determine the amount due by adding daily interest by the number of days that are late. For instance, if the £1,000 loan was paid 30 days late, you could charge 34p per day x 30 = £10.27.
The majority of payments go towards reducing the interest owed first
For example, if you received a payment of £1,000 for the £1,010.27 that is now due the balance due is £10.27 that was the first debt. Interest on the £10.27 would continue to accrue.
It is not applicable when you have not agreed to this with your customer.
The outstanding amount fluctuates on a daily basis. an ongoing basis
Be practical, as payer or payee, about settling the credit.
As an example, it is agreed that if the debt is paid within one week, then there will be no additional interest charged.
Your VAT position will not be affected.
You are charged interest on the principal value of your debt (including any element of VAT) however, you don’t pay taxes on interest.
You do not have to tax on any debt recovery costs you have claimed.
- How to get an interest claim
If you decide to charge interest for late payments, it is essential to provide for it in your routine credit control system.
Even if you don’t want to collect interest, make sure you mention the rights you have in your ‘terms and conditions declaration. It may encourage customers to pay on time.
Inform each customer in writing
Declare that you will charge interest on late payments as you are entitled to do under law.
Contact regular late payers to examine how this system might affect them. Inform them that late payments cost you money.
It is important that your customers know and agree with your payment terms
Inscrive the payment date you agreed upon on each invoice you send.
The invoice should clearly define your terms and conditions and also that you plan to exercise your right to charge interest for late payments.
Inform customers about the moment when interest begins to build up
Include the following information:
the invoice number that was originally issued;
What account is the bill to be used for;
the amount due;
the interest that the customer is expected to pay every day;
to whom the payment should the payment be to be made;
payment instructions.
Give the customer the final invoice after everything has been paid
The final bill must contain the number of days for which interest has been charged for and the base rate that was utilized in calculating the interest.
The clock ticks on
In the event of claims for interest for late payment do not have to be filed immediately.
A supplier has six years within which to file a claim
Terms of trade must have been agreed and the customer duly notified when interest began to accumulate.
The six-year claim period is the same in England, Wales and Northern Ireland however, it is five years only in Scotland.
Companies can still claim after they have stopped supplying a customer
The only way for buyers to ensure they are not subject to future claims is to settle bills promptly.
Liquidators and receivers acting in connection with a company can also pursue ex-customers to collect interest on late payments, going back up to six years.
- What if a customer objects?
Even though it is against the law, your customer might not want to pay the interest due on late payments, but they cannot ‘opt out’ from doing this. For the sake of maintaining good relationship with customers, consider alternative methods of getting your money before considering legal actions.
It is important to state that you’d like to come to an agreement regarding the outstanding debt
If you cannot reach agreement with your client, you can follow several strategies to collect the cash.
Consider applying pressure by placing your customer’s name on a list of stop lists
The sales stop at the expense of the consumer until that debt has been paid.
Think about selling or transferring the debt (or the portion of it) to a third-party
For example, you might use a debt collection agency.
The debtor’s buyer can seek out the courts to negotiate the payment of the debt and the interest.
If you sell or transfer the debt, you have to notify the customer in writing that it has been transferred to a third party.
You may decide to take your claim to court
Your claim will be helped If you are able to provide documentation in writing that shows that you’ve delivered your goods or completed the task, and that the customer was happy.
If you have legal expense insurance, it should be a reason for those who are not paying to pay when threatened with legal action.
- Additional assistance
Further advice on claiming and paying interest on late invoices is available from a number of sources.
The Small Business Commissioner
If you’re having trouble with the issue of late payments from customers Contact with the Small Business Commissioner. They provide a free service to assist you in setting up an effective system for controlling credit at the start and follow up with any customers who are withholding payments which ought to have been paid in accordance with contract. Their interest calculator can be helpful and also useful.
This independent public body was established to combat late payment practices in the UK.
Your accountant or financial adviser
They should have an understanding of the law and how it may affect your business.
Your local business support organization or trade association
If you are an enterprise of a medium or small size with more than 250 staff members, your business association – such as The Federation of Small Businesses or the Forum of Private Business – might be able to court on behalf of you to fight unfair contract terms.
