Summary
- UK businesses can charge interest on late payments either by relying on the statutory right under the Late Payment of Commercial Debts (Interest) Act 1998 – which applies to business-to-business transactions at a rate of 8% plus the Bank of England base rate – or by including a contractual interest clause in their terms and conditions.
- Contractual interest clauses must not be excessive or unreasonable, and must provide a substantial remedy for late payment; if they fail to do so, the statutory rate under the Act will apply instead.
- Charging interest on late payments protects cash flow, deters late payment, and allows businesses to recover additional costs; however, sending a payment reminder before applying interest is good practice and often resolves the issue without damaging the business relationship.
- This article is a plain-English guide to charging interest on late payments for UK businesses, prepared by LegalVision, a commercial law firm.
- LegalVision specialises in advising clients on commercial contracts and debt recovery.
Tips for Businesses
Include a clear interest clause in your contracts or terms and conditions before issues arise, and ensure the rate is proportionate and enforceable. Communicate payment terms and interest provisions to customers upfront. Send a payment reminder before applying interest. If relying on the Act, confirm the transaction qualifies as a business-to-business agreement and that no exclusions apply.
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 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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When Should You Start Charging Interest?
Timing is crucial when charging interest on late payments. You should clearly communicate your payment terms upfront, including when interest will begin to accrue. Typically, interest starts accruing the day after the payment due date specified in your invoice or contract.
Before charging interest, consider sending a payment reminder to your customer. Many late payments result from administrative oversights rather than deliberate non-payment, and a friendly reminder often resolves the issue without damaging the business relationship. If payment remains outstanding after your reminder, you can then notify the customer that interest is accruing on the debt.
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.
This fact sheet outlines how your business can manage a dispute.
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, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced disputes lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Can I charge interest on debts owed by consumers rather than other businesses?
The Late Payment of Commercial Debts (Interest) Act 1998 only applies to business-to-business transactions. For consumer debts, you can only charge interest if your contract with the consumer specifically includes an interest clause. However, any such clause must be fair and transparent under consumer protection legislation, and excessive interest rates may be deemed unfair and unenforceable.
What happens if a customer refuses to pay the interest you have charged?
If a customer disputes or refuses to pay interest charges, you should first review whether you have a valid contractual or statutory right to charge interest and whether you have followed the correct procedures. If you are confident in your position, you can pursue the debt (including interest) through the usual debt recovery process. However, consider whether the amount of interest justifies the time and cost of formal recovery action, particularly if it might damage an otherwise valuable business relationship.
When does interest start accruing on a late payment?
Interest typically starts accruing the day after the payment due date specified in your invoice or contract. You should clearly communicate your payment terms upfront, and consider sending a payment reminder before charging interest.
Do I have to charge interest for late payments?
No. You are not legally required to charge interest, but having the right to do so provides protection against cash flow risks and can prompt customers to pay on time.
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