Late payment of commercial debts can hinder a cash flow of a business substantially, throwing the business itself into turmoil if one big customer is late paying their invoice.
The knock-on effects of one customer paying late are still underestimated. If your company is paid late, you could be paying your own suppliers late, causing them to pay their contractors late, and so on. Also, the longer this goes on, the more trouble it will spell for your business. You could be hit with late payment fees or interest, or even served court papers for failing to pay an invoice which could result in a CCJ. This would damage your credit score and could squash a lot of opportunities for future business ventures or further extended credit for your business.
So what can be done?
Fortunately for UK businesses the EU’s Late Payments Directive offers some power when it comes to late payments. The term Late Payment legislation refers to the Late Payments of Commercial Debts (Interest) Act 1998, the Late Payment of Commercial Debts Regulations 2002 and the Late Payment of Commercial Debts Regulations 2013.
The statutory right to claim interest and other compensation recovery costs and entitlements being made from 16 March 2013, are not compulsory and it is for the supplier to decide whether or not to use rights made available.
It is worth noting that adding in extra charges without prior warning could significantly damage your relationship with your customer, so if you are going to charge late payment fees; ensure they are made aware that this is a possibility when they sign the contract.
Many companies include late payment fees for multiple reasons; especially for being proactive about your cashflow. If you’ve repeatedly asked for payment and aren’t getting anywhere, the process can be pretty draining not only financially but emotionally too.
Chances are if your client isn’t paying you, they probably aren’t paying their other suppliers either. You’ll get paid before other contractors if you have stricter payment policies.
If your clients run the risk of paying extra fees if they don’t pay you on time, they may prioritise your payment.
Similarly, with banks that offer an ‘interest-free period’, if the money isn’t paid back within that time, interest charges are then added. It is a good policy that many businesses mirror for their clients.
Having a strict payment policy demonstrates a professional, serious business. By having a late payment policy in place, you are demonstrating that you aren’t willing to put up with late or non-payment for your services. It establishes that you are a serious business with strict, professional policies when dealing with other companies and you will return the same professional manner as you expect from your customers for a good working relationship.
You can add interest to late payments using the statutory interest rate of 8%, plus the Bank of England’s flat rate for business to business transactions. So for example, as the interest rate currently stands at 0.75%*, you can charge 8.75% from the day the invoice became overdue. You’ll then need to send another invoice to show the amount you are adding. It is worth remembering you cannot claim statutory interest if there’s a different rate of interest in a contract.
You can also claim debt recovery compensation costs on late payments, which is a fixed sum for the cost of recovering a late commercial payment on top of claiming interest from it. The amount you are allowed to claim depends on the amount of debt, and it can only be charged once for each payment.
The late payment legislation has said you can claim:
If late payment fees aren’t enough to get you paid, you have two options for debt recovery. You can go down the debt collectors route, or you can take legal action. There are good and bad aspects of both, which you can read about in our guide to debt recovery.
Creditsafe also works with trusted partners to collect your debt for you, taking it out of your hands on a no-win, no-fee basis.
Prevention is better than cure when it comes to late payments; here are our top 10 tips for getting paid on time:
Ensuring money is coming in and out of your business is a critical part of your credit control process, as well as having a process set up to tackle late payments and recover any debt if you need to.
Creditsafe is equipt to help with all your needs when it comes to debt recovery. From monitoring your customers to debt chasing letters and debt collection; we offer the tools to help get your invoices paid.