Paying late can cause problems with cash flow and increase the possibility that you may not get fully paid. By exercising your legal right to demand interest from late paying customers can encourage customers to pay on time.
The lawful right to interest and compensation is applicable for all 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 power to charge interest for late payments
The right is applicable to sales to business as well as public sector clients.
The right 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 client is late in paying.
The customer can’t impose unjust conditions, for instance, contract payment terms are typically set at 60 days.
Customers of the public sector are required to pay within 30 days , and interest for late payments cannot be lower than the legal amount.
In the absence of any specific payment terms in the absence of any specific payment terms, the statutory rights will apply.
The rate of interest starts to be charged at the end of the agreed credit time
If you are not able to agree on credit terms, normally it is considered late after 30 days.
For a late payment interest calculator click here..
What does it mean?
According to the law, finance directors aren’t able to obtain additional credit from suppliers in order to increase the flow of cash by paying bills late on the deadline.
There’s less credit available with a slow payment
The ‘base rate plus 8’ formula means that money ‘borrowed’ to delay payment is more costly than overdraft money that is deposited with the bank.
- The interest rate
The law provides you with the power to charge interest at Bank of England base rate plus 8percent.
For instance, if the basic rate was 0.5 percent, you may apply interest rates of 8.5 percent.
Rates for calculating interest are fixed for six months
The base rate of 31 December is used for loans that are due between 1 January and 30 June. The rate in effect for 30 June is in use from 1 July through 31 December.
You can also claim reasonable debt recovery costs
You can claim £40 for debts under £1,000. You can also claim £70 when the debt is between £10,000 and £1,000, and £100 for debts that are greater than £10,000.
If your expenses are greater than this (for example, if you are working with a debt collection agency) you may claim’reasonable recover costs.
You can only claim these costs if you are claiming the interest payable in accordance with the Act. If you do not claim interest, or you have to claim it in a contract arrangement or the provisions of another Act You are not able to claim the cost.
- Do you have to charge interest?
While the interest rate is very high but the amount of funds involved could only be a few pounds. Consider how charging interest and costs might impact your relationships with your customers.
Consider how customers will likely react
Examine if late payment has been restricted to a small number of your customers, or if most of your customers have to pay late.
Request employees on the front line (eg in sales) to share their thoughts.
Examine the effectiveness of your credit control system
If you’re not successful in getting the money you owe the customer may object to the idea of having to pay interest and recovery expenses.
Be sure to use a credit control system will meet your business needs.
Discover what businesses in your industry are doing
Your trade association could be able of providing guidance.
Ask your customers if their other providers charge interest for late payments.
It isn’t mandatory to charge interest or debt-recovery costs
You are free to set you own conditions and terms.
- What happens if a payment is late?
Under normal circumstances the two of you will have agreed with your customer when payments should be made. The length of time for payment in the contract that is negotiated is typically 60 days.
A payment is late if it is made on or before the end of the credit term agreed upon.
Contracts can be verbal or written. Verbal agreements are harder to prove.
If there is no agreed credit period, the law establishes a default period of 30 days
You are allowed to charge interest for up to within 30 days of the day that you delivered your goods or provided the service or after you informed the purchaser about the amount of debt, whichever is the earlier.
To inform the purchaser about the amount of due amount, it is best to send an invoice. But any other form of notification would do like a telephone call – though that might not be a good idea in the case of dispute.
Payment terms that are standard practice may have become established
This is regarded as the credit term in the without any agreement.
If, for instance, the buyer usually will pay you on the final Friday of the month after the month that you send your invoice, this is 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 to part payments triggered by the finalization of a particular portion of the project – such as, for instance, finishing the foundations of a building the interest will begin beginning the day the milestone has been reached.
It is not the same as an advance as well as an installment (which is not dependent on a particular event). Interest starts on these when the goods have been delivered or the complete task has been completed.
- Calculating the interest
Calculating the amount of interest to be paid is an easy, step-by step procedure.
Calculate the interest
Multiply the amount owed by the interest rate (base rate plus 8%). For instance, if the amount owed is £1,000 and the base rate 4.5% is 4.5%, then the interest will be £1,000 multiplied by 12.5 percent. This is £125.
Calculate the daily interest by dividing annual interest by the number of days in 365.
Work out the amount due multiplied by daily interest times the amount of days due. For example, if the £1,000 loan was paid 30 days behind, you can charge 34p x 30 = £10.27.
Every part of the payment goes to reduce the amount of interest owed first.
For example, if received a payment of £1,000 in relation to the £1,010.27 that is now due, the amount outstanding would be £10.27 from the initial debt. The interest on the £10.27 will continue to accrue.
This does not apply even if you’ve negotiated an alternative by a written agreement with your buyer.
The amount outstanding changes on every day basis
Be realistic, as a payer or payee about paying the obligation.
For instance, agree that in the event that the debt is settled within one week, then no interest is charged.
Your VAT position is unaffected
You charge interest on the principal sum of debt (including any VAT element) however, you do not have to pay tax on the interest.
Nor do you have to pay VAT on any debt recovery expenses you have claimed.
- How to make an application for interest
If you choose to charge interest for late payments, it is essential be prepared to cover it as part of the regular credit monitoring system.
Even if you do not plan to collect interest, draw attention to what rights are available in the ‘terms and conditions’ statement. It could encourage customers to pay in time.
Notify each customer in writing
Indicate that you will be charging interest for late payments, as you are able to charge by the law.
Contact habitual late payers to talk about how your system could impact them. Tell them that their late payments can cost you money.
Ensure that your customers understand and accept your payment terms
Include the payment date that you have agreed to on each of your invoices.
The invoice must clearly mention your terms and conditions and also that you plan to apply your right to charge interest for late payments.
Inform customers when interest begins to accumulate
Give the following information:
the original invoice number;
what account the bill is for?
how much is owed;
the additional amount of interest the customer will owe you each day;
to whom the money should be made;
Present the customer with the final bill when everything has been paid
The final bill should specifically specify the amount of days for which interest has been paid and the base rate utilized in calculating the interest.
The clock ticks .
For claims for interest due to late payments do not have to be made straight away.
A supplier has six years in which to file a claim
The terms of trading have to be set out and the client notified when interest began to accrue.
The six-year period for claims is the same throughout England, Wales and Northern Ireland however, it is just five years in Scotland.
Companies may make claims even after they’ve stopped providing customers with goods.
The only way buyers can to be certain of avoiding any future lawsuits is to settle bills promptly.
Receivers and liquidators working in connection with a company may also sue former customers for interest due on late payments that go back as long as six years.
- What happens if a client isn’t happy?
However, despite legal requirements, your client may be unwilling to make a payment for interest on a late payments – however, they are not able to opt out from doing this. To protect relationships with your customers, you should consider other methods of getting your money prior to taking legal action.
Be clear that you’d like to be able to reach an agreement about the outstanding debt
If you are unable to reach an agreement with your client, you can follow several methods to get the money.
Think about applying pressure by putting the customer on a stop-list
It is not possible to make further sales at the expense of the consumer until that debt has been paid.
Think about selling or transferring the debt (or part of it) to a third party
For example, you might use a debt collection agency.
The purchaser of the debt can use the courts to obtain payment of the debt , as well as the interest.
If you transfer or sell the debt, you have to notify your client in writing that the debt was assigned to a third-party.
You may decide to make your claim known to the court
Your claim will be supported by providing documentation in writing that shows that you’ve delivered your goods or completed the task, and that the customer was happy.
If you’re carrying legal expenses insurance, this will encourage an individual who is not a payer to pay in the event of legal action being threatened.
- Additional assistance
More information about claiming and paying interest on late invoices is available from numerous sources.
A Small Business Commissioner
If you are struggling with late payments from customers Contact your small Business Commissioner. They can provide a service for free to assist you with setting up effective credit control initially and then pursue any customers who are delaying payments that must have been made in accordance with the contract. Their interest calculator can be helpful and also useful.
This independent public body was created to address tardy payment practices in the UK.
Your financial planner or accountant
They should have an understanding of the law and how it could affect your business.
Your local business support group or trade association
If you’re an established small or medium-sized company with between 250 and 250 staff members, your association , such as the Federation of Small Businesses or the Forum of Private Business – might be able to court on behalf of you to challenge unfair contract terms.