When an SME is looking to recover debt, daily interest can accrue for each day your invoice remains outstanding along with a compensation fee – without getting lawyers involved. Acting out of a matter of principle, it is an effective way to successfully manage your business cash flow.
The interest rate is calculated by taking the Bank of England’s base rate (currently 0.5%) and having the option to add up to 8%. Therefore, a maximum annualised interest charge of 8.5% can accrue until a bill is fully settled. On top of this, a one off compensation fee can be added of:
- £40 (if debt is less than £1,000)
- £70 (if debt is between £1,000 – £10,000)
- £100 (if debt is more than £10,000)
What’s more, this is statutory, meaning that you don’t need to go to the courts to obtain consent to charge daily interest and compensation. Your entitlement to do this is all laid out in the Late Payment of Commercial Debt (Interest) Act 1998.
If a debtor owes you £8,000 and is 100 days late in paying their invoice, it works out that you are legally entitled to charge £187.55 in additional interest fees. Adding a compensation fee of £70 results in a recoverable sum of £262.55 owed – on top of the £8,000 invoice amount.
Charging late payment interest will not only improve your cash flow, but act as a vital weapon in your armoury to make crystal clear to suppliers to avoid being late on payments in the future. If the situation arises where the debtor refuses to pay or disputes an invoice, you can pursue the claim through the courts if this is felt necessary. Often, just by mentioning court action via a Letter Before Action can trigger the desired outcome of your debtor settling the invoice AND paying the daily interest/compensation. Job done.
What you need to know….
- Late payment interest can only be charged if: the debt was incurred in the supply of goods and services; your debtor bought from you for business purposes; the debts are not consumer credit agreements; there are no other types of late payment interest in your terms and conditions.
- Where both parties have not agreed a payment period for invoices, a 30-day rule (after you have delivered the goods or sent the invoice) is applied before daily interest can begin to be charged. Where both parties have agreed a time limit to pay invoices daily interest can also begin to accrue on the first day after this has exceeded.
- You do not need to notify a customer in advance about a decision to charge late payment interest and it does not need to be contractually stated, but it is best practice to do so.
- Don’t add the daily interest rates to the invoice – notify your customer by writing to them about this instead, or better still let our legal team do it for you.
- You have a six year window to claim statutory interest for late payment (5 years in Scotland). It can also be applied in retrospect, meaning if you receive payment for an invoice but it is one year late, you can still pursue daily interest payment for that full year as a matter of principle.
Article by Debt Guard
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