Guide to dealing with late payments for SMEs

One of the concerns of many small and medium size business owners is the number of their customers that are late in arranging payment of their invoice. Such delays can cause financial issues for those awaiting payment of varying degrees but could lead to some businesses being liquidated.

Research carried out in September 2015 by Lovetts, a firm of solicitors that specialize in the recovery of commercial debt, found that a mere 22% of invoices were paid on time, 49% were paid within 1 month of when the bill should have been paid and 23% were kept waiting between 1 to 2 months after the "payment due by" date. 

So, what more can be done by a business to encourage more of their customers to pay their invoices on time? Well, the Late Payment of Commercial Debts (Interest) Act 1998 and the Late Payment of Commercial Debts Regulations of 2002 and 2013 may help in this respect so let's have a look at these in a little more detail.

What does the above Act/Regulations enable businesses to do?

Quite simply, the above Act and subsequent Regulations enable businesses (sole traders, partnerships and limited companies) to charge their customers interest and fees in respect of overdue invoices.

What is the interest rate and charges?

Interest at 8% above the Bank of England base rate can be charged plus a fixed penalty charge based upon the amount of the liability: -

• Debt of up to £999.99 - £40 charge
• Debt of between £1000 - £9,999 - £70 charge
• Debt of £10,000 and above - £100 charge

Other reasonable costs to cover such things as legal expenses may also be charged. 

Must a business include anything about late payment of invoices in its terms and conditions?

No. The conditions of the Act and subsequent Regulations apply automatically.

However, a business can include its own different payment terms, interest rate and fees within its terms and condition. If this is the case, the conditions contained in the above Act and Regulations will not be applicable.

How long does a customer have to pay an invoice by?

If a business does not include details of when an invoice has to be paid by in its terms and conditions then a customer has 60 days in which to pay the invoice (30 days if the customer is a public authority or body).

The 60-day period comes into force from either the date that the customer receives notification of the liability or from when the goods or service is provided.

How does a business inform a customer that it is going to start charging them interest on an overdue invoice?

The business that is owed the money merely needs to inform their customer orally that they are going to have to pay interest and pay a charge although it may be a good idea to confirm this in writing. A claim for interest/charges can be made up to 6 years.

Conclusion

Although not a legal requirement, incorporating details about late payment of its invoices within a business's terms and conditions would appear to be worthy of consideration. If a business were to make it quite clear to its customers that late payment could lead to interest and charges being paid then this should encourage more of its customers to settle their bills on time.