For SME’s in all industries, late payment for goods and services can be a real issue. Cash flow is harder to manage for small suppliers, and SME owners can often feel helpless when dealing with large customers.
A question on the lips of many SME’s we have spoken to is “What tools can I use to ensure speedy recovery of payments?”
One method by which SME’s can push for payment of invoices is by claiming interest on late payments. The statutory right to interest, compensation and reasonable costs of recovery applies to all commercial contracts and, as the interest on sums due accumulates it provides a powerful deterrent to late payment.
The law gives the supplier the right to charge interest at 8% above the Bank of England base rate – however, although the Bank of England has recently changed that rate to 0.25%, SME’s can continue to charge at 8% over the old rate at 0.5% until 31 December 2016.
In many cases, the rate of interest dictated by the Bank of England base rate plus 8% will be more expensive for a late paying customer (who is effectively borrowing from you) than the cost of overdraft borrowing from the bank. This incentivises timely payment.
You may think that claiming interest on late payments may seem to be adverse to good customer relationships, but by having a clear system in place, suppliers can actually avoid awkward situations.
Communication with late payers is key, and can be distilled into 3 steps:
- State agreed payment dates on all invoices and your intention to exercise the right to charge interest, penalties and reasonable costs on late payments.
- If the invoice is not paid by the agreed date, inform customers of the interest, penalties and costs that they are now accruing.
- Once the payment has been received, issue a bill to the payer informing them of how the interest was calculated and how much was paid.
This communication is an effective tool for ensuring timely payment with the minimum of friction between supplier and customer, and no undue surprises for the customer.
If you would like to know more about how to deal with late payments, one of The Endeavour Partnership’s Commercial Disputes Team will are more than happy to help.