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Can Businesses Charge Interest For Late Payments?

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If your business provides a good or service to a customer, it likely expects to be paid on time. Nevertheless, customers who fail to pay their invoices on time can cause cash flow issues for your business. As such, it is vital to protect your business from the risk of late or even non-payment. One way to encourage timely payments is to charge interest for any late payments. This article will explore whether your business can charge interest for late payments. 

How Charging Interest Can Protect Your Business From Risk

Your business should have a plan to mitigate the risks of customers failing to pay on time. Customers failing to pay could result in severe cash flow problems. Further, you may need to incur additional time, costs and resources into chasing unpaid debts. 

Charging interest for late payments can significantly protect your business from risk, as it can:

  • allow you to recover additional fees from customers who fail to pay on time; and
  • prompt customers to pay invoices when they are due. 

How Can Businesses Charge Interest for Late Payments?

Your business can charge interest for late payments on any of the following basis:

1. Statutory Rights to Charge Interest 

Your business can claim interest under a business-to-business agreement under the Late Payment of Commercial Debts (Interest) Act 1998 (‘the Act’). 

Under the Act, you can claim ‘statutory interest’ from another business that is late in paying for your goods or services. The current rate of interest is 8% plus the Bank of England’s base rate. You can also claim certain debt recovery costs. 

You can rely on the Act to claim interest if your sales contract does not specify interest charges. However, you should note that you may not claim statutory interest if your contract applies a different interest rate.

You should note that various conditions apply when claiming interest under the Act. Additionally, certain types of agreements are also excluded and cannot benefit from the rights under the Act. You should ensure you understand these conditions when seeking to claim statutory interest.

2. Contractual Right to Claim Interest 

Including interest clauses in contracts or your terms and conditions can be highly effective. This is because you can refer to those clauses when prompting customers to pay and remind them that interest will accrue on the sums they owe. 

However, you should take care when including interest provisions in your standard contract terms. You must ensure that the interest clauses are not excessive and unreasonable. If a customer challenges the interest rate in your contracts because it is disproportionate and the dispute is taken to court, the court might deem the provision unenforceable.

Further, the amount of interest you charge must provide an alternative ‘substantial contractual remedy’ for late payments. If your interest clause fails to do so, then the interest rate under the Act will apply. That is to say, if you agree to a very low-interest rate on a customer’s request, it would not be an effective remedy for a late payment. 

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Practical Considerations When Managing Late Payments

While you are not legally required to charge your customers interest for late payments, having these rights will give you comfort when trading. This is particularly the case in today’s economic climate, where cash flow is vital, and businesses often fail to keep up with payments due to financial difficulties. 

In addition to charging interest, robust payment terms in your contract and a thorough credit control procedure may help protect your business from non-payment risk. 

Key Takeaways

Your business should take proactive steps to avoid late payment problems. One key step to take is to charge interest for late payments, which can deter customers from paying late. This can also help you recover costs you may have had to pay for following up with late payments. You can either:

  • rely on the legal right to claim statutory interest; or 
  • set out an interest clause in your commercial contracts or terms and conditions. 

If you choose to do the latter, you should ensure that your contractual interest provisions are not excessive or unfair. This is something a commercial lawyer can advise you on. 

If you need help recovering payments owed to your business, our experienced disputes lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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