Can I charge interest on late payments?

Many businesses struggle to keep cash flowing in and delays by customers in paying their bills is often a major factor. There is a range of strategies that you can use to get in the money owing to your business - from credit checking before you close the deal, up front payments and deposits where appropriate to incentives for prompt payment and effective credit control procedures. Despite all that, if payments are still owing you may have to examine your other options.

Before you resort to recovery procedures, you may want to think about applying interest to the outstanding amounts. Your question at this stage is – can I charge interest on late payments? The good news is that, in many cases, you can. For this you have the EU to thank.

As regular readers of this blog will know, I am not always in favour of laws imposed by the EU which affect SMEs, particularly where there is no demonstrable benefit for those businesses or indeed they may well amount to apparently unnecessary red tape. The aptly, if not very snappily, named Late Payment of Commercial Debts (Interest) Act and its accompanying regulations is a useful set of legislation for businesses to have at their disposal.

These rules been around for quite some time, but were brought into effect in stages, so the detail was not too widely known. Updated rules come into force on 16th March 2013, so this is an opportune time to summarise what they will mean from then. The late payment rules:

• apply to all business-to-business contracts for the supply of goods and services - with certain exceptions (such as consumer credit agreements, mortgages and other security contracts), so do not apply where one or both parties to the contract are consumers.

• apply to a qualifying debt – the contract price under a commercial contract.

• give businesses the right to claim interest (referred to in the rules as “statutory interest") on late payments as set out in the rules.

• set a rate for statutory interest if the contract does not provide an acceptable alternative. The rate of statutory interest is currently 8% over the Bank of England base rate.

• allow alternative provisions to be set in the contract, but to contract out of the late payment rules effectively it must include a “substantial remedy” for late payment of the debt.

• set payment periods after which interest starts to apply. These are basically 30 days from the latest receipt of invoice or receipt of the goods or services or of verification or acceptance.

• allow the parties to agree an extension of up to 60 days beyond the statutory dates mentioned above for business-to-business contracts or 30 days for public authority contracts. In business-to-business contracts the payment period can be extended beyond the 60 day limit, but to be valid such extension must not be “grossly unfair” to the supplier.

These rules giving the right to charge interest on late payments are very helpful to businesses. My strong recommendation would nevertheless be to make sure that you have robust contracts in place to protect your business by covering such matters as what is ordered, when and how it is to be delivered, when payments are due and how they are to be made.

By drawing up your own contract you can specify what will suit your business rather than relying on how the late payment rules deal with such matters. Even if you decide to accept the rules - the statutory rate of interest is after all quite favourable at present – in my view it is still useful to refer to that expressly in your contract to bring it to the attention of your customers.

For advice on your business contracts and terms of business, contact me, Sue Mann.

Sue Mann

Business Contracts Solicitor, Birmingham

For free advice on this topic please call us on 0845 003 5639.