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.

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).

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:

• Claim interest at 8% above the Bank of England base rate on outstanding invoice amounts
• Claim compensation of between £40.00 - £100.00 per invoice on any that are overdue
• Claim additional reasonable costs of collecting the debt if they are more than the above compensation amount (i.e. solicitor fees)

​
The exact amount of compensation that can be claimed varies depending on the value of your invoice:

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.

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.

Once a payment is overdue all you need to do to claim the interest and compensation is write to your customer detailing the:

• Invoice number/reference that is now overdue
• Late payment compensation which you are claiming on this invoice
• Daily rate of interest that will be accruing until payment is made
• Total amount currently owed
• Methods that payment can be made (bank transfer, credit card, cheque sent to your business address etc.)

​
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.
​

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.

In October 2017 the debt recovery process for businesses owed money by individuals changed significantly.

Previously there was no specific pre court action process for recovering debts, but on 1 October 2017 the Pre-action Protocol for Debt Claims came into force.

A Pre-action Protocol sets out the various steps that the court expects both sides to take before commencing legal action. Issuing legal proceedings should always be a last resort, and so both parties need to have ideally first tried to settle their dispute without having to involve the court.

Whilst there are already Pre-action Protocols for other types of civil claims such as personal injury, professional negligence and possession claims, certain business debts will also now need to follow a set 'pre legal action' procedure.

The Protocol is designed cover businesses claiming repayment of a debt or unpaid invoices from an individual. However the definition of an individual includes sole traders, so the Protocol also applies to business to business debts when a sole trader is involved.

There are also a few exceptions where the debt protocol doesn't apply, mainly around claims where there currently is another Pre-action Protocol that exists (such as with mortgage arrears or construction and engineering disputes).

​Part 2.1 of the Pre-Action Protocol outlines its aims, however in summary they are to:
​

• Promote early engagement and communication between the creditor and the debtor, ensuring the timely sharing of information on the amount owed to ascertain if any points are disputed;
• Encouraging the parties to settle the matter without court proceedings by considering paying by instalments or using alternative dispute resolution;
• Ensure both parties act reasonably and in a proportionate manner;
• If court action is unable to be avoided, support efficient management of court proceedings.

​

While a primary goal of the protocol is to provide additional time and protections to consumers, it actually includes many business to business debts. This is because the protocol considers both consumers and sole traders to be individuals.

Failure to comply with the Protocol prior to commencing court proceedings may result in the court imposing sanctions against the creditor or claimant. The sanctions imposed are likely to be in relation to costs.​

To quote the Protocol: "If a matter proceeds to litigation, the court will expect the parties to have complied with this Protocol."

​If the debtor states that they are looking to gain professional debt advice, the creditor has to permit the debtor reasonable time for them to obtain this advice, at least a further 30 days. This may be longer if the debtor can provide a reasonable explanation as to why it will take additional time to obtain the advice.

If the debtor states on the Reply Form that they need more time to pay the debt, the parties should attempt to reach an agreement for the amount to be settled by instalments. If a payment schedule or agreement cannot be reached, the creditor must confirm in writing why it does not accept the debtor's instalment proposal.

Should a partially completed Reply Form be received, the creditor is expected to make contact with the debtor to discuss the content and obtain the further information necessary to understand the debtor's position.

A creditor ignoring the debtor's reply and their reasons is not an option.

​If there is a disagreement about the debt being owed or the exact amount, then the parties should consider mediation or any other forms of dispute resolution rather than commencing court proceedings. This may be a formal process with an ADR provider or may simply take the format of a documented discussion and negotiations.

After these negotiations if an agreement is still not reached, then the creditor should give the debtor notice of at least 14 days of the intention to now commence court proceedings.
​

​The new Protocol creates a more formal and paper heavy procedure for your business to collect overdue invoices, as it requires that additional documentation and time is given to the debtor.

​Plus there is always the potential for persistent debtors to use the Protocol to further delay payment.

So as a business you need to stay on top of your credit control procedures and issue a Letter of Claim as soon as it is reasonable to do so. Also having a solicitor draft the letter in compliance with the Protocol ensures that you can move quickly to court action should payment not be forthcoming.

Wouldn't all companies love it if their customers paid invoices on time? You wouldn't need to spend time chasing debts and you could concentrate on actually running your business. However debtors will most likely be ever present.

Businesses can invoice clients early, wait patiently for payment, send chase emails and be optimistic that payment will someday finally land at the bank.

​But sometimes those polite little reminders, sending copy invoices and monthly statements are just not enough to deal with those customers who are adamant they are not paying.
​

 
​​So what can you do to ensure your business is paid the money it is owed? How do you collect debts from customers?

​Choosing how and when you need to take formal action can be difficult and there are a few informal options at your disposal before starting legal action. After all, the last thing you want to do is spend time and money going to court for every invoice that is overdue by a few days.

But when you've exhausted the chasing letters and phone calls, we wanted to share our experiences and tips on how to collect debt from a customer, starting with establishing your legal position on the debt.
​

While the vast majority of business debts won't require court action, it is important to establish your legal position and understand how to collect a debt legally.

​​In order to take a debt claim to court, you need to have some kind of evidence that the debt amount you wish to claim is due. In most cases a copy of your invoice, bill or order will suffice, however generally you should have evidence of:
​

• the total amount that was billed and is now overdue for payment from your customer (i.e. you gave them a bill or invoice)
• proof that goods were delivered or services provided (i.e. delivery was made or the job was complete)
• previous informal communication with the customer making them aware of the debt (i.e. email or text messages chasing payment)
• formal advanced notification to the debtor informing that you intend to take legal action (i.e. a Letter Before Action or Letter of Claim)

With the above steps and evidence in place, you should be in a good position to start legal proceedings against the debtor.

However if the customer disputes the money is owed, for example because they believe the goods were faulty, you may need to take steps to investigate and resolve the business dispute before proceeding with formal debt action.
​

Informal actions such as sending overdue notices, emailing the debtor's accounts team and speaking directly about payment should all be attempted yourself before you begin seeking assistance with recovering the debt.

​But once you do decide to go down a more formal route to secure a payment you have a few options:
​
​Option 1 - Submit a debt claim yourself 
To make a court claim on your own you can use the HMCTS Money Claim Online service. It offers a process to recover the money your business is owed by walking you through the submission of an online claim and paying a court fee.

You need to be aware that these are court proceedings and so you should familiarise yourself with the 'pre action' rules along with what happens should you win your claim and receive a judgment. Ensure you read the associated Money Claim Online User Guide thoroughly before starting the claim process.
​
Option 2 - Hire a debt collector
When you hire a debt collection agency they will start chasing the debt and in some scenarios begin the legal process to recover it through the courts. You should bear in mind that debt collection agencies don't have any special legal powers beyond what you can do yourself. Generally a debt collection agent will also take a proportion of any debt that they are successful in collecting to cover their fees.

Option 3 - Instruct Debt Recovery Solicitors
A Solicitor should provide some general advice on the process and your prospects along with a fixed fee of what they will charge. If their fees are more than the money you are seeking from your customer, then you'll be better going with another route. However experienced debt recovery solicitors should have a fee structure which complements the amount you are wishing to recover and the complexity of the issue (i.e. it will be more complicated if the debtor defends the claim or disputes the debt being owed).

In the majority of debt recovery claims, the initial solicitor's 'Letter Before Action' often does the trick and the customer will opt to pay their bill rather than face court proceedings from a law firm.

If court action is needed a solicitor can explain the risks and advise on items such as recovering court fees and any statutory late payment charge that can be made. For example, interest may be able to claimed on top of the debt (usually 8% above base rate) via the Late Payment of Commercial Debts Act.​​
​

​​You may feel bad 'hounding' a customer about paying their debt or even getting a solicitor involved, but you shouldn't. You did your job and it is not your fault they have failed to pay you in a timely manner.

Being understanding to your customers while knowing your legal rights is what all responsible businesses should aim for.