According to recent figures, 80% of companies routinely pay their bills late. In 1998, an Act (the Late Payment of Commercial Debts (Interest) Act 1998) came in allowing small businesses to charge business companies interest on the debts that they pay late. Late payment can hugely affect small companies and can sometimes force them to borrow money in order to stay afloat. The act was extended in 2002 to give more benefits to small companies and allow larger companies to also use this legislation. However, this law only applies in England and wales.

When can I charge interest?

The earliest date you can charge interest is on invoices raised on or after 1 November 1998. You can charge large companies and public sector companies 8% over the base rate on any overdue invoices.

From 1 November 2000, small businesses were allowed to charge other small businesses 8% over the base rate on any overdue invoices. Note that you must use the base rate which was in force at the end of the day on which the contract states the payment should have been made.

For this law, a small company is classes as on which has 50 employees or less. Big companies are classed as those with over 50 employees. Public sector companies are classes as Government agencies, departments, non-departmental public bodies and local or public authorities.

What can I charge?

All businesses and public bodies can claim statutory interest on the late payment of business debts. They can also charge all reasonable debt recovery costs – this will depend on the size of the debt.

You can set your own credit period when you exchange contracts. You should include a clause which states you will claim interest if a big customer does not pay up on time. If you do not set a credit period or state you will chase for interest, you can still invoke the law. It is assumed that payment is due 30 days from delivery or invoice, whichever is later. You can apply the law for any size of overdue payment.

Further Action

If they are still not paying, you can pursue the non-payer through the courts. If the amount is under £5,000, you will have to go through the Small Claims Court. It is better, however, to try and clear the matter up before you try and pursue court action.

The Act permits you to separate the interest from the initial debt so you are allowed to pursue the interest alone, even if the intial debt is eventually settled. You can also outsource the interest on the debt to a third party, such as a factoring company.

The problem of going through the courts is that the company will probably not want to deal with you again unless it is absolutely necessary. Going through the courts needs to be the final straw and must be given a lot of consideration before any action is taken.

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