Futureproof your debt recovery strategy: late payments and charging interest

In a previous article, we looked at what rights businesses have when claiming interest on late payments by customers under the Late Payment of Commercial Debts (Interest) Act 1998 (Late Payment Act). 

But what else do businesses need to consider concerning interest on late payments? Debt recovery expert Matthew Brady gives his top tips to help you manage your late payment process effectively. 

Include interest rates in your contracts

There are two ways of determining the level of interest you can recover. You can either set the rate upfront by building it into your contracts or if you don’t, the Late Payment Act implies a term in contracts regarding recovery of interest.

Under the Late Payment Act, a party can claim interest at the statutory rate of 8% above the Bank of England’s official Bank Rate. 

We recommend agreeing on an interest rate for late payment as part of your contractual terms before providing any goods or services. This ensures clarity over the interest that will be payable in the event of late payment.

You should take care in determining the appropriate rate, as it could be deemed a penalty if set too high.

A contractually agreed interest rate (subject to its wording) also avoids any fluctuations in the Bank of England base rate. 

Make sure invoices are paid on time

The Late Payment Act applies to business-to-business contracts and allows recovery of interest even where the contract does not provide for this. You need to know the payment date for invoices and meet those payment dates.

Likewise, you should be aware of the dates payments are due from your customers to ensure you seek interest when you’re entitled.  

If you’re late in making payment, you could be charged interest at the contractual rate or at the statutory rate of 8% above the base rate, which could be considerable depending on the value of your contracts.

Put a late payment or payment recovery plan in place

If you find yourself in a position where you cannot avoid making a late payment, you should communicate this with the party expecting payment. It may be that you can agree on a late payment plan.

You could look to ensure any agreed late payments (as part of a late payment plan) are not subject to interest. 

Alternatively, from a creditor’s perspective, we recommend you have processes and reminders in place to alert the debtor when payment is about to become due or is outstanding.

Starting your payment recovery plan as soon as possible generally gives you a better chance of recovering payment.

Recover additional costs

Under the Late Payment Act, you’re entitled to a fixed sum in addition to the interest on a late payment between £40 and £100, depending on the size of the debt.

You are also entitled to reasonable costs of recovery of the unpaid debt less that fixed sum. However, these costs may not be substantial depending on the sums in dispute. 

The entitlement to recover the fixed sum and reasonable costs arises under the Late Payment Act; where you include contractual interest as an alternative, you may not have an automatic entitlement to recover these sums, although there may be scope to recover some limited costs if you ultimately issue court proceedings.

Further information

We now have a portal for businesses, Muckle Collect, which helps streamline your invoice recovery and helps get your cash flow back on track.

Please contact us for details about how Muckle Collect can help your business recover unpaid invoices plus interest.

If you need help recovering debts or interest on late payments, please get in touch with Matthew at [email protected] or your usual Muckle LLP contact.