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Are you claiming interest on your bad debts?

By Susan Lewis, Jordans Solicitors.

I am often asked by clients to trace their bad debts for them when invoices have been outstanding for many months.  I am surprised at the number of clients who do not routinely charge interest on their outstanding invoices.  Until I raise it with them, they often have not thought about charging interest.

The Government introduced The Late Payment of Commercial Debts (Interest) Act 1998 nearly 18 years ago to try and encourage swift payment of businesses invoices to help cash flow which is one of the main reasons for firms failing to succeed.  The Act allows businesses to charge a high rate of interest when they are trading with other businesses as a means of encouraging their customer to pay quickly.  The amount of interest that can be claimed is 8% above base rate so the total rate is 8½% presently.  In addition, compensation of up to £100 can also be claimed depending on the amount of the invoice.  Despite this legislation having been in place for almost two decades it is, in my experience, rarely used.

You can rely upon this legislation if you do not have any alternative terms in your contract with your customer setting out how you will charge interest on the late payment on any of your invoices.  You therefore do not need to refer to the legislation in your terms and conditions.

I also frequently see businesses that do have their own terms and conditions refer to a lower rate of interest.  The rate quoted is often something like 4% above base rate and where businesses have chosen a different rate to that stated by the legislation they are, however, bound by their own terms and conditions.  It is worth checking your own terms and conditions to see what rate you are able to claim and you may find that you are doing your business a disservice by stating a much lower rate than the legislation permits.

There may be some businesses that may choose not to claim interest, perhaps to preserve an important relationship with a customer.  It is, of course, a decision for you whether or not you want to choose to claim interest on outstanding invoices or not.  You may fear that your customer will simply go elsewhere if you push them too hard for payment and claim interest as well.  The idea behind the legislation is a deterrent against customers delaying payment excessively if they think that they will have to pay more and it is therefore worth mentioning how much interest you will charge at the bottom of your invoice when you send it out.  The legislation allows you to set payment terms which could be 7 days, 14 days or longer.  If you do not have any terms at all then the default position is that interest under the legislation can be charged if the invoice has been outstanding for more than 30 days.

If you do not presently charge any interest on your invoices I would suggest the following:

  1. You review any terms and conditions that you have to see what interest, if anything, you are claiming. If your terms set out a lower rate of interest than 8½% consider having your terms and conditions re-drafted.
  1. If you do not have any terms and conditions or your terms are silent about claiming interest, consider whether you want to start claiming interest. This could be on a customer by customer basis perhaps just for those customers that routinely delay making payment.
  1. Consider making clear reference to charging interest on your invoice when it goes out to your customer and also any communication that you have with your customer when you begin to chase payment.

If you would like any further information about this topic, please contact Susan Lewis on 01924 387110 or by email:  susan.lewis@jordanssolicitors.co.uk

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