Charging Interest on Late Payments

Article Loss Prevention by

Tim White of Marquis & Lord (Consulting Scientists) writes about his experience in maintaining a positive cash flow

  • Are you aware of your business’ legal right to claim interest on late payments from other businesses?

  • Despite all business to business transactions since August 7, 2002, being applicable, many businesses are still unaware of their rights under the Late Payment of Commercial Debts (Interest) Act 1998.

  • Make sure you know about your businesses rights, and use them to help make sure you are paid on-time, every time.

These are the messages being put out by schemes promoting the use of the legislation. Many companies do not attempt to enforce their rights for fear of alienating clients. However, it is often the threat of enforcement of this statutory right which can improve your cash flow [This has been the experience of Marquis & Lord]. In all but a few cases late payment is as results of slipshod or non existent purchasing procedures in client organisations, rather than any malicious attempt to defraud. The constant threat of late payment charges causing embarrassment to the purchaser, for unauthorised expenditure, does wanders for their concentration in terms of ensuring prompt payment processing.

It is the ability to claim interest rather than the act of enforcement that has the most benefit. However, there are some pitfalls that must be avoided.

  1. Prior notice of your intent to invoke your rights under the Late Payment of Commercial Dept Act 1998 must be given prior to the issuing of an invoice.

  2. If you link your interest charges to an index bee sure to change your finance charge rate when the index alters, otherwise criticism could affect your chances of recovery.

  3. Keep the message live, i.e. make sure you mention your policy in your terms and conditions and place a footnote on every invoice.

  4. Send out statements of account two weeks before the payment is due carrying the same warning message that interest will be charged on late payment.

  5. Do not be shy about sending out invoices for interest charges, but do put a limit on their value; for example do not send them out for less than a minimum sum determined by you as a matter of policy.

If you feel uncomfortable about the process think of how you feel when you get your credit card bill and a finance charge has been applied. You don’t stop using it do you?

Finally, the practice of charging for late payment can have one supreme advantage if you are forced to negotiate payment of fees, for example if a client is in receivership, it is far less painful to accede to a lower amount than original charged if you can agree to write off the interest and get what you originally asked for.