Late paying customers are usually the primary source of business cash flow problems. Research by Siemens Financial Services found that a typical UK SME spends an average of 130 hours a year chasing late payments and unpaid invoices often account for 14% of a small business' annual turnover.
How you manage late payers can have a huge impact on your business, so utilising your legal and statutory rights to claim interest and compensation will help mitigate the impact of late paying customers.
When is an invoice considered overdue?
Usually you will have specified on your invoice, order or contract terms when payment should be made by. Often this is 14, 30 or 60 days from the date of the invoice or delivery of the goods or services.
If there is no payment period agreed, then legislation sets a default period of 30 days.
Therefore, in the absence of a set payment period you are able to class a payment as late 30 days after you delivered the goods or services, or 30 days after informing your customer of the debt (whichever is later).
Charging interest on overdue invoices in the UK.
All businesses have a statutory right to charge interest on any late payments. This is detailed in the Late Payment of Commercial Debts (Interest) Act 1998 (the Act) which creates a right to statutory interest in commercial contracts for the supply of goods and services.
Therefore, if you supply goods and services for business purposes and do not have a provision for claiming interest on overdue payments in your terms and conditions, you can rely on the above Act to claim both interest and compensation. In summary it allows a business to:
The exact amount of compensation that can be claimed varies depending on the value of your invoice:
Do I have to include something in my terms or invoices to claim interest?
No, there is no requirement to inform your business customers at the time of the order or purchase that you will claim interest and compensation for late payments inline with the Act.
However if you do make customers aware that further charges will be incurred on overdue amounts, either on your invoices, statement of account or terms and conditions, it may serve to deter any late payments from occurring in the first place.
When does the late payment of commercial debts act apply?
Business to Business transactions only
Importantly interest and compensation under the Act can only be claimed on commercial contracts (B2B) and not on consumer contracts (B2C).
Undisputed debts only
If there is a genuine dispute as to whether the customer owes the invoice amount, then you will be unable to add further charges until the dispute has been resolved and the amount owed clarified. Therefore, it is always better to enter a dialogue with customers as early as possible as to why they are disputing the debt and haven't paid.
Consumer Credit and Security exclusions
There are a few types of contracts that are excluded in the Act (section 2), specifically Consumer Credit Agreements and contracts that function via a mortgage, pledge or other type of security.
Customer relations consideration
Whilst it is your legal right to charge compensation and interest on any overdue commercial debts, you may also want to consider the impact on future business with the customer. If you've had a good trading history with them up until recently, you may wish to contact them by telephone to make sure they are fully aware of the overdue debt before writing to them to advise of the interest and compensation additions.
How to claim compensation and interest on unpaid invoices.
Once a payment is overdue all you need to do to claim the interest and compensation is write to your customer detailing the:
If you are a VAT registered business, note that VAT should not be added to the compensation charge.
You may also be want to refer to the 'Late Payment of Commercial Debts (Interest) Act 1998' as the basis for your calculations in case your customer is unfamiliar with the entitlement.
Finally, keep a copy of the letter as it will provide useful evidence in the event you need to begin court action to recover the debt in the future.
Late Payment Eligibility ChecklistWhen you can claim under the Late Payment of Commercial Debts Act
What if a customer refuses to pay the interest or invoice?
If the charges that have been added are the only reason for none payment, you may wish to take a commercial view on the debt.
For example, if your unpaid invoice is £9,000 but your customer is refusing to pay the additional £70 late commercial payment compensation, you may wish to forgo the compensation entailment in favour of recovering the outstanding invoice amount quickly.
But if payment isn't forthcoming even after advising your customer of the accruing daily interest, then your next step is to start the process of pursuing the debt through the courts.
Legal Advice and Action
At this point it would be beneficial to contact a solicitor to advise on what debt recovery options are available to your business and the most cost effective way to recover the monies owed.
This usually involves first sending the debtor a formal Letter Before Action which will again detail the amount owed, the interest and compensation due and inform that if payment is not forthcoming court proceedings will be issued without further notice. Interest will still continue to be charged during the court process as well as additional amounts being able to be claimed to contribute to your legal costs.
Whilst hopefully the combination of chasing, advising of interest accruement and a solicitor Letter Before Action will result in swift payment, you need to keep in mind that any court claim must be started within six years of the last date a payment was made or when the debt was acknowledged.
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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