Cash-flow problems are a common cause of business distress, and very often poor cashflow is caused by late payments from customers and clients. Knowing your rights as a business to recover your costs against late payment of debts will help to ease the strain of unpaid invoices. Tightening up your Terms and Conditions along with your Credit Control procedures will make a noticeable difference to your cashflow.
You have a statutory right to claim interest on late payments under the Late Payment of Commercial Debts Regulations 2013, as well as a contractual right to claim interest if you have specified this in your terms and conditions. Purchasers cannot contract out of late payment legislation and cannot deny the supplier their right to charge statutory interest.
When to charge Late Payment Fees and Interest on your Invoices
You can charge interest on all late payments from the date a payment becomes overdue, but depending on your customer relationships you may want to tailor the way you enforce this.
Best practise would be to address each debt on a case-by-case basis, and give consideration to the relationship with the customer. Answer these questions to decide how to handle each overdue invoice:
- Is this a new or long-standing customer?
- If the customer is long-standing, do they usually pay on time?
- Were you forewarned that payment would be late?
- Has the customer already received the goods or service that they are being invoiced for?
- Is there a problem with the order that needs resolving?
- Have you already reminded the customer that the payment is overdue?
Sometimes, customers may have a legitimate reason for a late payment that is out of their control. You should consider whether the amount of interest you would charge or the late payment fee you charge would be worth upsetting the customer over. Although, with persistent offenders, you may need to start charging interest to act as a deterrent, however, good credit control procedures should eliminate the need for such action on a regular basis. If you have spent a lot of time chasing a particular customer, have incurred interest on your own payments as you are waiting for payments to clear a balance, or have spent money passing a debt to an external collection agency then it is more than justified to claim the costs that you have incurred, so long as this was stated as an option in your original terms and conditions.
If you find that many customers do not pay their invoices on time, look at how and when invoices are sent, and consider whether the process of invoicing could be improved to encourage customers to be more responsive.
What rate of interest should I use for Late Payments in my Business?
Rates for calculating interest are called reference rates, and are fixed for six-month periods. The Bank of England base rate on 31 December is used as the reference rate for debts becoming overdue between 1 January and 30 June of the following year. The rate in force on 30 June is used from 1 July to 31 December.
Claim debt recovery costs on late payments
You can also charge a business a fixed sum for the cost of recovering a late commercial payment on top of claiming interest from it.
The amount you’re allowed to charge depends on the amount of debt.
|Amount of debt||What you can charge|
|Up to £999.99||£40||per Invoice|
|£1,000 to £9,999.99||£70||per Invoice|
|£10,000 or more||£100||per Invoice|
You can also calculate the interest payable on overdue bills by taking the relevant reference rate and adding 8 per cent. You are free to set your own contractual rate which may be higher or lower than the statutory rate. If you do, then the statutory rate no longer applies.
Interest should be charged on the whole amount owing inclusive of VAT but do not add VAT to the interest charge itself.
This is what one of our clients says about Late Payments in their business:
“I used to feel sheepish around Late Payment Charges in my business, and debts would regularly reach 60 days past due. It wasn’t until I had to get a loan out to pay my supplier because I was owed so much money that I realised why it’s important to minimise the damage that late payments cause to my cashflow. Since I started being stricter with my charges I have felt a lot more in control”