When money owed to your business is not paid on time it can have serious knock-on effects. Resources will need to be devoted to chasing payment, cash flow will be affected and overdraft facilities may have to be extended. Recouping some of these costs from defaulting customers through interest and late payment charges can help to balance the books.
In this article our commercial dispute resolution team, explain your options.
You can impose interest and late payment charges through your terms and conditions of trading. However, care must be taken to ensure that in the case of business-to-business debts the amounts charged are not so excessive they could be described as grossly unfair, and in the case of business-to-consumer debts that the charges levied are not so high as to be unreasonable.
In most cases, interest and late payment charges should be based on the actual costs incurred in pursuing an outstanding account and in having to rely on an overdraft or loan to tide you over.
The interest and charges that can be added to consumer debts will be limited.
Late payment of commercial debts
For business-to-business debts, interest at eight per cent above the Bank of England’s base rate can be claimed under the Late Payment of Commercial Debts (Interest) Act 1998. Fixed late payment compensation of between £40 to £100 can also be claimed, depending on how much you are owed.
For invoices in respect of orders placed after 16 March 2013, reasonable recovery costs can also be added where the cost of recovering the debt exceeds the compensation payment.
Where you intend to rely on the Late Payment Act you should make this clear on your invoices, and as soon as an account is overdue you should write to the debtor to advise them of this and to confirm:
- how much interest has already accrued and the daily rate at which it will continue to accrue until the account is settled;
- the amount of compensation claimed; and
- recovery costs sought where these exceed the compensation allowance.
It is important to note that reliance on the Late Payment Act can only be made where there is no contractual right that can be relied on. Where contractual provision does exist this must be used instead, unless it can be shown that the provision in question fails to provide you with a ‘substantial remedy.’ This might be the case, for example, if it is your customer’s contractual terms that govern your relationship and the interest and charging provisions contained within them are set very low.
Interest under court rules
Where court proceedings need to be issued to recover payment you can elect to claim interest under the County Courts Act for proceedings issued in the County Court or the Senior Court Act for proceedings issued in the High Court. This can be a useful option when dealing with consumer debts where the right to charge interest is not covered in your terms and conditions.
You have six years in which to recover debts, interest and other charges so you need to ensure you keep outstanding amounts under regular review.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.