Late payment Interest explained
This article will outline late payment interest explained in detail. Late payment interest provisions are often used by businesses as an incentive for customers to ensure that they pay their bills and invoices on time. While a creditor does have the statutory right to demand late payment interest on any outstanding loan or payment, it is entirely discretionary. Whether or not the creditor makes use of this right is up to them.
Late payment interest fees can help you pay for some of the loss associated with having to wait for late payments. However, there are also those who suggest that they can lead to cash flow problems on behalf of the debtor that can disrupt their ability to continue paying what they owe.
Your right to late payment interest
All businesses are given the right to demand late payment interest as part of The Late Payment of Commercial Debts (Interest) Act 1998. This was written in part ot make sure that creditors could recoup some financial loss in the event of late payments and to act as an incentive for people to not be late with their payments when possible.
Effectively, it allows any creditors to claim interest, compensation, and reasonable costs for collecting the debt (provided they are over the compensation amount) on any invoices or financial contracts not paid in time.
The Late Payment of Commercial Debts (Interest) Act 1998 sets the interest chargeable on late payments at 8% plus the Bank of England base rate. This is the statutory interest that can be demanded by any business.
If a business has a different rate of interest on late payments as laid out by their contract or Terms of Business, they cannot claim a right to this statutory interest, however.
Setting your own late payment interest rate
If you don’t want your business to rely on the statutory interest as laid out by this act, you can instead have provisions for late payment interest in your own contractual agreements with clients and customers.
There are, however, rules on setting this rate. A contractual agreement has to follow the below criteria:
- It has to provide a “substantial remedy” to late payments
- It cannot impose unfair payment terms, such as only applying contractual payment periods at 60 days
- Late payments can’t be lower than the statutory interest on public sector goods and services
If there is no contractual agreement, then the statutory interest laws will apply, instead. Once again, a business owner’s decision to enforce or not enforce their right to late interest payments is entirely at their own discretion.
The late payment interest rate
As mentioned, without a contractual agreement containing a specific interest rate, a business that seeks late payment interest can only seek the amount as determined by the statutory rate. At the time of writing, this is the Bank of England base rate plus 8%.
If the base rate is 1.2%, then the business owner could seek interest payments of 9.2%. The base rate is usually determined every six months, so a business owner must see which rate is in effect, whether it’s the January-to-June rate or July-to-December rate for that year.
Claiming additional costs
Aside from the late interest payments, business owners also have a right to claim reasonable debt recovery costs if they exceed the compensation amount. How much a business can claim is determined by the overall value of the debt. They are as follows:
- £40 for debts less than £1,000
- £70 for debts between £1,000 and £10,000
- £100 for debts of £10,000 or more
If the costs of recovery are higher than this, there may be some grounds for a business to seek additional compensation. However, these rights only apply where businesses are using the statutory interest rate as determined by the Late Payment of (Commercial) Debts Act. If you have set your own contractual rate, this doesn’t apply to your late interest payments.
Determining late payments
In order to make sure the application of late payment interest rates are fair, care must be taken to determine and define late payments in a way that clear and fair. For both the statutory interest rate and contractually defined interest rate, the contractual period cannot be over 60 days in most cases.
In order to show a late payment, companies must have a provable verbal or written agreement that lays out the agreed credit period. Any payments that are made beyond that agreed period are susceptible to late payment interest.
However, in cases where there is no agreed credit period, the law has a default credit period of 30 days after the goods have been delivered, the services provided, or the debt customer/client has been notified of the debt. If there are multiple dates for these events, the law accepts the credit period as which happened late as the date to start counting those 30 days from.
It’s recommended that businesses maintain written invoices for any notifications of debt as well as agreements to contract periods. Phone calls and other forms of communication do count as agreements, but they can be more difficult to pay.
Claiming late payment interest
If you do decide to go ahead and charge late payment interest to your debtors, then you need to have a process in place to do so. A routine credit control system can ensure that this is done fairly within the business. It should include the following:
- Notifying the customer in writing about the interest being charged on late payments and explaining your rights and their obligations
- Making sure that customers understand both the original terms of the agreement as well as your right to exercise late payment interest
- Informing them as interest starts to accumulate as well as it when it adds
- Providing a final bill which includes the debt remaining as well as the total interest
As mentioned, it is entirely at the discretion of businesses to determine when they do or do not want to use their right to late interest payments. However, Find Uk People can ensure that you’re able to make those decisions by helping you find any debtors that have slipped under your radar.