It’s really important to know where you stand when it comes to the legality of late payments. Which is why for our latest guest blog we’ve asked the Legal Editor over at Rocket Lawyer, Camilla Johnson, to run through exactly what the law says about late payments, and what can be done about them.
5 Key Questions on Late Payment
As a small business owner late payment can be the difference between insolvency and growth.
Late payment from customers can stymie small business growth and even lead to insolvency. As a small business owner, you need to know how to prevent late payment and what to do should you find yourself with a customer who will not pay up.
How can I prevent late payment?
You can perform a credit check on potential customers. By doing this you can discover if they have any outstanding county court judgements against them relating to debt.
It’s a good idea to set out your agreed terms with a customer in a bespoke contract or have in place visible terms and conditions, so that your customer knows when they have to pay and any interest they will accrue if they don’t.
When is a payment late?
If you haven’t agreed contractually when the money should be paid by, the law says for business transactions after either the customer gets the invoice or delivery of goods or provision of services (if later).
A customer has not paid, what should I do?
Make sure to chase payment by telephoning and sending letters
Late payment letters remind your customer that they have not paid. This is an important step, as you must show that you have done everything possible to recover the debt before making a claim in court. You should consider sending two late payment letters and then a final letter before court action. These 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.
What interest or charges can I claim?
If you have agreed a contractual interest rate you can charge interest at that rate, however if nothing has been agreed then you can charge interest at the statutory rate of 8% plus the Bank of England base rate. The current Bank of England base rate is 0.5% so you can charge 8.5%.
You can also charge a business a fixed sum for the cost of recovering a late commercial payment on top of claiming interest. The amount you’re allowed to charge ranges from £40 to £100 depending on the amount of debt.
The customer has not responded to my letters, what should I do?
If a customer has not paid after repeated letters 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.
Alternatively you could issue a statutory demand if the undisputed debt is more than £750. Once you serve a statutory demand, if the debt is not paid within 21 days, you can apply to wind up a company that owes you money or make an individual bankrupt. You should only issue this if there is no dispute that you are owed the money.
Should you need it we’ve created a late payment letter template as part of a separate blog post, ready to download and use.
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