Cashflow is the lifeblood of any successful business and the late or slow payment of invoices can lead to financial problems. In 1998 legislation was implemented to help promote a culture of prompt payment between businesses.
How can the legislation help you?
The Late Payment of Commercial Debts (Interest) Act 1998 was introduced to compensate you for the late payment of debts. It only applies to the commercial supply of goods and services where there is no provision for interest in your Terms of Business.
You can claim interest, compensation and reasonable debt recovery costs if another business is late paying for goods or a service. You can agree a payment date or if there is no agreement, a default period of 30 days will apply.
How much can you claim?
The interest you can charge is called ‘statutory interest’ – this is 8% plus the Bank of England base rate (currently 0.5%).
You can also charge a fixed sum as compensation. The amount you’re allowed to charge depends on the amount of the debt:
- Up to £999.99 £40
- £1,000 to £9,999.99 £70
- £10,000 or more £100
You can claim the above compensation, per unpaid invoice, whatever your collection costs are. However, if your reasonable costs of recovering the debt come to more than the compensation, you can claim this as well. This can include the costs you incur from instructing a solicitor to act on your behalf in respect of the debt recovery.
Practical steps to take
It is not necessary to inform your customers that you intend to claim Late Payment interest, compensation or recovery costs if invoices are not settled on time. However, it may be beneficial for your cash flow to give them an advance warning of your intentions, should payment be made late. This could be achieved by including wording to this effect on your invoices and in your standard terms and conditions of business.