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Charging Interest on Late payment and when to Use Late Payment Legislation?

use late payment legislation

I’m sure many businesses have an interest clause within their Terms and Conditions in regards to late payment. I’m also sure that many businesses never take full advantage of late payment interest due to fear of damaging a relationship with a customer, or simply that they don’t know how to effectively apply it. However, the mention that Interest and other costs might be applied to a debt is good leverage to use on obtaining payment more quickly.

If you do not have any terms regarding charging interest on late payment in your terms and conditions, you can rely on the Late Payment Legislation or as formally referred to ‘The Late Payment of Commercial Debts (Interest) Act 1998 as amended and supplemented by the Late Payment of Commercial Debts Regulations 2013’.

The Act allow you to negotiate the interest rate on late payment but not opt out. Therefore, if your terms and conditions say, for example. you are entitled to charge interest at 4% above Nat West base rate, you can only charge that amount.

Having a late payment interest clause in your T&Cs is a must for any business, but I would highly recommend aligning any late payment interest with the Late Payment Act . This allows you to charge 8% above Bank of England base rate (a fairly substantial figure which is meant to be punitive, not compensatory), but it also allows for compensation and additional recovery costs to be added to a debt if the compensation amount does not cover all your costs.

When should your right to charge interest  come into play?

Referring to Late Payment Legislation (i.e. adding interest) should come into play when a customer hasn’t paid their invoice by the due date. I wouldn’t, however, jump straight in when an invoice is one day overdue and add these costs, this could hurt your relationship with a customer; that being said, if your customer has a history of late payment with you then I would act swiftly when they become overdue (and be FIRM).

Once you have chased for payment to no avail, inform your customer that this is a road you will be forced to go down, and one you are legally entitled to. Often just the indication that interest will be added to the outstanding amount will spur customers into paying.

Am I eligible to use Late Payment Legislation?

Late Payment Legislation can be used as long as your terms and conditions don’t stipulate another form of contractual interest. If your T&Cs do indeed state a different late payment interest rate, then you will have to revert to that amount, rather than use 8% above base rate. However, the Legislation does still entitle you to apply compensation and reasonable debt recovery fees. In any case I would always recommend aligning any late payment clauses with Late Payment Legislation.

How can you avoid hurting a customer relationship when using late payment legislation to your advantage?

You may want to take the soft approach when chasing payment from your customers, which is a perfectly acceptable chasing method as long as your cash flow doesn’t suffer as a result. However, should you have a customer that you are wary of upsetting, there is a way to open their eyes to the impact late payment legislation could have. Calculate all interest you could have charged them on top of their overdue invoice and present it to them in a way that says you would never charge this, but you do indeed have the right to so what can we do to help you pay the invoices more quickly?

Our Improving Collection Performance training provides you with the knowledge and know-how of applying Late Payment Legislation as well as many other effective credit management strategies, book your place today.