Claiming interest on late payments

9th April 2018 General, News Nicola Roby

For small businesses in all industries, late payments for goods and services can be a real headache. Late payments create cash flow problems and can increase the risk that you will not be paid at all.   Nicola Roby, Director at CHW Small Business Accountants in Bolton explains that using your legal right to claim interest from late-paying customers can encourage customers to pay on time.

The statutory right to interest and compensation applies to all contracts and, as the interest on payments accumulates, it can be a powerful deterrent to late paying customers. You need to decide whether to enforce your rights, and if so how.

By law a supplier is entitled to charge interest at 8% above the Bank of England’s base rate. In many cases, the rate of interest dictated by Bank of England base rate plus 8% will be more expensive for a late-paying customer, who is effectively borrowing from you, than overdraft money from the bank.  This can encourage timely payment.

Some business owners are worried that claiming interest on late payments could damage customer relationships, but actually, by having a clear system in place, you can avoid awkward situations.

Clear communication with customers is key, and here are some basic rules:

• Include agreed payment dates on every invoice and state your intention to exercise the right to charge interest on late payments.
• Contact habitual late payers to discuss how the system will affect them. Explain that their late payments cost you money.
• If the invoice is not paid by the agreed payment date, contact the customer detailing the original invoice number; the account; the amount due; the interest being incurred each day and payment instructions. Inform customers regularly of the interest that they are now accruing.
• Once the payment has been received, the final bill should specifically mention the number of days that interest has been charged and how it was calculated.

Nicola says “Despite the law, your customer may be reluctant or even unwilling to pay interest on late payment – but they cannot refuse to do so. Business owners do, however, need to consider the impact of the decision to charge interest on late payments on ongoing customer relationships.”

If you would like to know more about how to deal with late payments, or for any other advice relating to your small business accounts, contact Nicola Roby at CHW Small Business Accountants in Bolton on 01204 534031 or via our contact us page.

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