For those who own a business, it is essential everything runs as smoothly as possible. In that respect, a consistent cash flow is the lifeblood of sustaining operations. As a result, late payments can have severe consequences, leading to cash flow problems, reduced growth, and even threaten the viability of the business. They may also strain business relationships and damage reputations.
Typically, businesses outline payment terms in their purchase agreements, specifying the expected timeframe for invoice payments. But what options are available when a customer is late paying their bills?
Debt recovery options
Assuming there is nothing wrong with the quality of goods or services a business provides (i.e. the customer is not rightly refusing to pay because there was an error with their order) you, as a business, are entitled to sue in court for payment, plus interest and court legal costs.
Indeed, if a customer fails to heed any warnings or chase-ups from your financial department, not only can your business bring proceedings for payment of the invoice itself, but you can also claim interest and compensation.
In 1998, the Late Payment of Commercial Debts (Interest) Act came into force (later revised in 2015 by Scottish Government regulations). The purpose of the Act is to provide suppliers with a statutory right to interest on late payments in commercial transactions.
Right to interest
Under the Act, a business is entitled to claim statutory interest on overdue payments on each invoice that is paid late and outside of any agreed payment terms. This interest is calculated at a rate of 8% per annum above the Bank of England base rate. Interest starts accruing from the day after a payment is due, as stipulated in the contract (usually 60 days) or, if no due date is specified, 30 days after the invoice date or the delivery of goods or services (whichever is later).
The rules do not apply to consumer transactions or mortgages, but to business-to-business deals, as well as contracts involving public and local authorities.
Fixed compensation
In addition to interest, creditors can also claim a fixed sum as compensation for the cost of recovering a late payment. The amount varies, based on the size of the unpaid debt:
- £40 fixed sum for invoices up to £999.99
- £70 fixed sum for invoices of £1,000 to £9,999.99
- £100 fixed sum for invoices of £10,000 and above
If the actual costs of recovering the late payment exceed the fixed compensation, the creditor can claim for reasonable costs incurred in recovering the debt, beyond the fixed amounts specified. Furthermore, any contractual term that attempts to override or reduce the rights provided by the Act is likely to be considered void and unenforceable.
The Act encourages timely payments by imposing financial penalties on late payers. It helps maintain healthy cash flow for businesses, which is essential for operational stability. In addition, creditors are encouraged to enforce their rights under the Act, to deter persistent late payments.
How a solicitor can help
Consulting a solicitor can be invaluable for businesses facing persistent late payment issues. Solicitors provide expert advice and practical assistance in several key areas:
- Advising on rights and remedies
A solicitor can clearly explain the rights and remedies available under the Late Payment of Commercial Debts (Interest) Act 1998 as outlined above. This includes calculating the interest and compensation owed – ensuring your business understands the financial entitlements, and how to enforce them.
- Drafting and reviewing contracts
Properly written contracts are essential in preventing late payments. Solicitors can draft clear, enforceable terms regarding payment deadlines and consequences for late payments. They can also review existing contracts to ensure they comply with the Act, as well as advise on any necessary amendments.
- Negotiating payment terms
Solicitors can assist in negotiating favourable payment terms with customers. They can help establish terms that are realistic and fair, while protecting the business’s interests. Adopting this proactive approach can prevent disputes and promote timely payments.
- Chasing late payments
You can also ask your solicitors to manage the process of chasing overdue invoices. This can include sending formal demand letters, which often prompt quicker payments. After all, the authority and reputation of a legal professional can often be more effective than informal reminders.
- Pursuing legal action
Of course, if informal methods fail, solicitors can initiate legal proceedings to recover unpaid debts. This might involve filing a claim in court for the outstanding amount, plus interest and compensation under the Act. Your solicitor will ensure that all procedural requirements are met. while representing and protecting your business’s interests throughout the process.
- Alternative dispute resolution (ADR)
In some cases, it may be beneficial to resolve payment disputes through mediation or arbitration. Solicitors can advise on the best ADR methods and represent the business in these proceedings, thereby resolving the issue while avoiding the need for court action.
Late payments can have serious consequences for businesses of all sizes. While it is best to try to resolve any issues amicably, sometimes circumstances prevent this from being possible. Any business owner looking to use the late payment interest provisions should seek suitable legal advice, bearing in mind this, along with the Late Payment of Commercial Debts (Interest) Act, can be a useful bargaining chip in bringing an uncooperative customer to order.
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John Roberts is a Partner and Director at Austin Lafferty Solicitors. John has been with the firm for almost 20 years, with experience in all areas of business law.
