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How to protect yourself from late payers

The Late payment of invoices is a recurring problem for many businesses, but you don’t have to suffer in silence.

Your Right to Claim Interest
The statutory right to claim interest on late paid invoices has been around since November 2008. Where the Act applies, a term is implied into the parties’ contract that interest starts to run on late payments at a rate of 8% above the Bank of England Base Rate.  In addition, there is also an entitlement to a small element of compensation on a sliding scale to contribute towards the cost of recovery.

What if you have already agreed a rate of interest in your contract?
The Act doesn’t prevent the customer and supplier from agreeing their own interest provision, but any term which excludes the statutory right will be void unless it creates a “substantial remedy”.  This means that a clause which imposes a low rate of interest will be disregarded and, by default, be replaced with the statutory rate.

What is a substantial remedy?
Every case must be looked at on its particular facts but it seems that anything under 3% is probably vulnerable to being challenged. 

What if the agreed rate is high?
A negotiated rate which is punitively high will be struck out, the test is whether it is a genuine pre estimate of loss. It should be remembered that interest shouldn’t be a windfall, but a payment to compensate the recipient for the payer’s breach of contract in paying the debt late.

So why do so few businesses exercise their right to claim?
Despite the fact that interest is a right, it seems to be rarely claimed.  In some cases the amount might not justify the effort or the desire to preserve a good customer relationship might be seen as more important, but often, it is the result of ignorance that the right exists.

But Think about this
A simple illustration shows how valuable interest can be.  Take the example of a company that delivers one invoice a week for £10,000.00 to one of its customers for over a year.  The total value of the sales is £520,000 and the profit is 5% (£26,000).  The invoices should be paid in 30 days but the customer is invariably late and on average takes an extra 30 days.  At the end of the year, the supplier feels let down about their customer’s payment record but is unsure what to do.  They are worried that if they claim interest, the customer will take their business elsewhere. 

Option 1
They accept what has happened.  The late payment meant they paid more interest on their overdraft which meant that the profit was actually nearer to 3% (£15,600) but still, they made a profit.

Option 2
They assert their rights.  The fixed compensation element is the top rate of £100 per invoice which gives £5,200.  The interest on each late paid account is £140, which gives another £7,200 making the total £12,480 which increases the profit over the year by more than 50%.

There is no defence
One of the attractions of a claim for interest is that it is very difficult to resist because payment of the invoice (albeit late) is generally confirmation that the amount claimed was due. The right to interest exists independent of payment of the debt and usually there isn’t an argument that it shouldn’t be paid.

Knowing about the right to claim interest can also be a valuable negotiating tool.  If the supplier in the illustration knew about their entitlement, they might offer to waive it in exchange for a price rise for the following year. 

In a competitive world where margins are often tight, interest can be the lever to encourage payment and provide the key to unlocking further substantial profit, knowing that the right exists is essential to be able to make the right decision.