How do you deal with late payments legally?

How do you deal with late payments legally?

This is a guest post by legal pros Rocket Lawyer. It covers what the law says about late payment in the UK, and what options are available to you as a small business if you have clients with overdue invoices.

Late payments are a common problem many businesses face. This problem is even more concerning for small businesses, where late payments can create cash flow problems, stifle business growth and be the difference between insolvency and profitability.

According to BACS, late payments cost UK SMEs over £2 billion annually. Therefore as a small business, you need to know how to prevent late payment, your legal position when faced with late payments and how to enforce debts against clients and customers.

Prevention is better than cure

It’s best to prevent late payment issues arising in the first place. You can take steps to perform credit checks on new customers, check to see whether they have any County Court Judgments against them (this can now be done online), agree clear terms and conditions of payment and keep an audit trail, as records are crucial to effective debt collection (more advice on all that here).

When does payment become late? When can you start charging interest?

Usually you would have agreed when payment is due, for example seven days after an invoice has been received, in your terms and conditions or agreement. This is known as the credit period. Payment is overdue when the agreed credit period has expired. If payment is not received once the credit period expires then payment is officially overdue and you can start charging interest.

If you don’t agree a payment date or credit period, then the law says that for business transactions, payment is late 30 days after the customer gets the invoice or delivery/ provision of the goods and services (if this is later).

Inform Customers of Late Payment

How do I inform customers of late payment?

You should send a payment reminder once payment becomes overdue. This records the late payment, the amount outstanding, the invoices in respect of the amount and the breach of the credit terms.

If the debt remains outstanding after the first reminder you should send another one when you think it’s reasonable, considering the number of days that you have given the customer in the first reminder to repay the debt. These letters should set out when the payment was due, how overdue it is, and any interest or charges that have accrued because of the late payment.

These are important steps, as you must show that you have taken all reasonable steps possible to recover the debt before making a claim in court.

How do I charge interest?

There are two types of interest: Contractual and Statutory.

Contractual interest is what has been agreed in any payment terms between the parties. If there is no such agreement, or your contract doesn’t state what interest rate is to be charged, then statutory interest applies. Contractual interest can only be claimed if it’s stated in the contract.

Statutory interest is the interest rate set by law which governs what interest you can charge on late payments. Statutory interest is 8% plus the Bank of England base rate for business to business transactions.

You can also charge a business a fixed sum for the cost of recovering a late commercial payment on top of claiming interest from it.

For further information read Rocket Lawyer’s guide on claiming interest on commercial debts.

Charge Interest - Late Payment

What if my debt reminders are being ignored?

If a customer has not paid after repeated reminders you may want to consider court action. Ensure that you have evidence of the agreement and your fulfilment of that agreement. The court procedure followed will depend on the amount owed. Any cases for under £10,000 will be dealt with by the small claims track. This is a relatively simple procedure in the county court.

For further information read Rocket Lawyer’s guide on issuing a money claim.

Should I get a lawyer involved?

This will depend on your individual circumstances. Sometimes it may not be necessary to involve a lawyer, especially if the debt is for a small amount. You will also need to factor in how much a lawyer will cost and how much of the debt you can actually recover.

However a lawyer can provide you with step-by-step assistance on recovering a debt. Ask a lawyer if you would like further assistance with debt recovery.

This post was written by Alan Cheung, a paralegal at Rocket Lawyer UK. He has a law degree from the University of Westminster and has recently graduated from the Legal Practice Course at BPP Law School. He is passionate about employment law and intellectual property and strongly believes in accessible and affordable legal services.

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