What do you do when a client ignores your requests for payment? What does the law say? Can you charge interest (and if so, how much)? If you run your own business these are key legal questions you need to know the answer to!
To help out we’ve put together a quick intro guide on the topic.
What Does the Law Say About Late Payment?
- All businesses have a right to charge other business customers and public sector organisations interest on late payments (but not to consumers).
- Unless agreed otherwise, the law states that payment must be received “within 30 days of getting your invoice, or the goods or service” (whichever is later).
- Some firms, especially larger ones, will demand longer payment terms. If they are longer than 60 days then they must be fair to both businesses.
- Payment terms can include discounts for early payment.
What Happens When a Payment is Late?
If an invoice is not paid within the agreed payment terms it becomes a late payment. This means:
- You have a legal right to claim interest (although you don’t have to).
- The interest that you charge is called ‘statutory interest’.
- The amount of statutory interest that you can charge is 8% of the invoice total, plus the Bank of England’s base rate for business to business transactions.
- The base rate is 0.5% as of writing (check the current base rate). So you are able to charge 8.5% interest on late payments.
How Do You Calculate Interest?
This interest is simple interest, not compound. So to work out how much you can charge you need to calculate what the amount of interest would be for a whole year, then work out the daily rate from that.
As an example, if you have a late payment worth £10,000:
- The annual amount of interest would be £850 (8.5% of £10,000).
- The daily amount of interest would be £2.33 (£850 divided by the 365 days in a year).
- After 10 days the amount of interest would be £23.30 (£2.33 x 10), after 30 days it would be £69.90 (£2.33 x 30), and so on.
If numbers are not your thing you might want to use a tool to work this out for you. A quick Google will give you plenty of options. We quite like this calculator by Don’t Pay Late.
To Charge or Not To Charge?
There are certain pros and cons you need to weigh up when deciding if you want to charge interest on late payments:
- In certain contexts 8.5% can be a high amount of interest (think, for example, of a savings account). But when it comes to statutory interest, this figure is hardly astronomical. In the example above it only means an extra £2.33 a day.
- Charging interest is your legal right. And sometimes it’s important to stand your ground, especially when larger firms try to use bullying tactics.
- But in the long run will it do more harm than good? Will it sour relations with what was a potentially lucrative customer?
- What do other businesses in your industry do? Is it a common problem or is this an isolated incident you can deal with as a one off? You can ask around on places like UK Business Forums if you’d like advice from people in a similar situation.
What if I Want to Charge Interest And I Want to Get Paid?
Bearing in mind you want your invoice paid and you probably want to keep your customer, this is a delicate matter. How do you manage the two simultaneously?
Be practical! Interest will go on increasing every day that the invoice goes unpaid. If you want to get paid it might be best to strike a deal with your customer. For example, if both businesses agree that the invoice will be paid within 7 days then no further interest will be charged.
Remember to confirm any revised agreements in writing. Verbal contracts are difficult to prove later on.
If you’ve tried this and it doesn’t work you can always opt for for more extreme methods. These include factoring or winding up a company. But even if the extra time and money mean the invoice gets paid, it could well be damaging for customer relations.
Is There An Official Route?
The Prompt Payment Code (PPC) is an industry-led, government backed initiative designed to promote a prompt payment culture in business.
- It encourages fair and reasonable payment terms (an absolute maximum of 60 days, with 30 days as the norm).
- Almost 2,000 companies have signed the PPC, including more than 100 ‘big’ firms with revenues of over £500 million.
- However, the scheme is still voluntary. And other than naming and shaming offenders there are not yet any tangible sanctions.