Late payments continue to challenge small and medium-sized enterprises (SMEs) across the UK, as outlined in the 2023 Prompt Payment and Cashflow Review. The report reveals that 62% of small businesses experience delayed payments on a regular basis, severely impacting their cash flow and stifling growth opportunities. Amongst these, 20% of SMEs reported facing acute cash flow issues due to late payments, often needing to rely on external financing just to cover essential operational costs.
For invoices from large companies, around 50% are paid within the standard 30-day term, yet many invoices extend to 45 or even 60 days—far beyond the terms expected by small businesses. In particular, SMEs in construction and retail are disproportionately affected, with over 70% in these sectors reporting late payments as a consistent issue.
If your business has been affected by late payments and lengthy debtor period, you may be entitled to charge interest.
Businesses can claim interest and compensation on unpaid invoices or debts under the Late Payment of Commercial Debts (Interest) Act 1998. Here’s a breakdown of how it works, how it's calculated, and how businesses can collect it:
Interest on late payments
- Statutory interest rate: If a contract doesn't specify a late payment interest rate, the statutory interest rate applies. This is set at 8% plus the Bank of England base rate.
- Calculation: Interest is calculated as: Interest=Amount Owed × Interest Rate × Days Overdue divided by 365. For example, if an invoice of £1,000 is overdue by 30 days, and the Bank of England base rate is 0.5%, the interest rate would be 8.5%, resulting in about £7 in interest for 30 days.
- Interest period: It applies from the date the payment was due until it’s paid in full.
Compensation for debt recovery costs
In addition to interest, the creditor can claim a fixed amount to cover recovery costs:
- Up to £999.99: £40
- £1,000 to £9,999.99: £70
- £10,000 or more: £100
- If recovery costs exceed the fixed fee, the business can claim reasonable recovery expenses.
Steps for collecting late payment interest and compensation
- Send a formal demand: Inform the debtor of the interest and compensation due, ideally attaching a breakdown of calculations.
- Negotiate: If possible, negotiate a partial payment or repayment plan.
- Legal action: If the debtor refuses, you can commence court proceedings to obtain a court judgment for the debt or in some circumstances pursue insolvency.
If unpaid debt are affecting your cashflow, please call our debt recovery specialists today on 0161 696 6170 to see how we could help.
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