31 May 2019

Late payment of invoices – why should your business suffer?

As debt recovery specialists, we work with a wide range of businesses across different sectors to ensure they are being paid for the work they do. A common problem that our clients encounter is late paying customers. Delayed payment of invoices can stifle cash flow and, in some cases, have a devastating effect on a business.

What can you do to protect your business?

Three key pieces of legislation can used to protect your business: the Late Payment of Commercial Debts (Interest) Act 1998, the Late Payment of Commercial Debts Regulations 2002 and the Late Payment of Commercial Debts Regulations 2013 (for the purposes of this article, we will call them “the Act”).

The Act can deter customers from making payment late and can also be used to provide compensation when payment is made late.

The Act applies to supplies of goods or services made by one business to another business, where no other remedy for late payment has been agreed in any contract. If a contractual remedy has been agreed and is ‘substantial’ that remedy will apply.

So, if payment of an invoice is late how can the Act help my business?

The Act entitles the business which is owed money to claim the following in addition to the invoiced sums, whether or not court proceedings have been issued.

(i) Interest: 8% above the Bank of England Base Rate, per annum. Interest is added at a daily rate from the agreed date for payment or otherwise 30 days from the date of supply. Interest can be claimed per invoice.

and

(ii) Compensation: A sliding scale dependent on the amount of the debt. Compensation can also be claimed per invoice.

Debt Compensation
Up to £999.99 £40.00
£1,000.00 - £9,999.99 £70.00
£10,000.00 or more £100.00

 

and

(iii) Costs: Reasonable costs incurred in taking steps to secure payment of the debt can be claimed, to the extent that those costs are not covered by the compensation claimed and provided the contract for supply was not entered into before 16 March 2013.

As a business you can use the Act to your advantage in a number of ways. Your entitlement to these additional sums is flexible. It is for you to choose if and when you apply interest and compensation, and you don’t have to apply it in every case. For example, you may consider not to seek interest and compensation if payment is made late by a loyal customer with whom you have built a relationship of trust. It is entirely your choice.

In our experience businesses who routinely add interest, compensation and costs to sums which are overdue for payment, and who have a reputation for doing so, will more often be at the front of the queue when their customers are deciding which of their creditors to pay first.

Being prepared to use your statutory entitlement under the Act can also be used effectively when you’re negotiating with customers to secure payment. If, for example, the customer claims that an invoice was not paid on time because it was not received, you may decide to waive your entitlement to interest and compensation on the proviso that payment is made without further delay.

Similarly, if you know one of your customers is suffering cash flow difficulties you may decide not to claim the additional sums as to do so may only push that customer further into the red, with the effect that you may have to wait longer for payment or, if the customer is unable to pay its debts and enters into insolvency, receive no payment at all.

An added bonus for you as a business is that by recovering sums under the Legislation, you can reduce the amount you spend on debt collection and you can even move towards a situation where your credit control function generates a profit for your business.

The Act has been designed to offer protections for businesses who suffer as a consequence of the late payment of invoices, but many businesses don’t fully understand their rights. Get in touch with our Head of Debt Recovery Services, Sara Souyave, to find out more about how our services might complement your in house credit control function.