As a small business owner, getting paid on time for all your transactions is essential. A late payment to a small business affects the business in many ways, from potentially not being able to pay staff or not being able to pay rent on time.
What is the Late Payment of Commercial Debts (Interest) Act 1998?
The Late Payment of Commercial Debts (Interest) Act 1998 states that a small business owner can charge interest and compensation on commercial debts that are paid late.
As the title of the Act suggests, the debt has to be commercial debt, which is a debt incurred in the course of running a business and supplying goods or services.
What type of transaction qualifies?
Interest under the Late Payment of Commercial Debts (Interest) Act 1998 can be charged if you, as a small business, either supply goods to your customers or if you provide a service to your customers.
Is there a rate of interest in your contracts or terms and conditions?
A small business is only entitled to charge interest under the act if no other interest rate is mentioned in its terms and conditions or contracts.
If the small business has terms and conditions or contracts that mention an interest rate in the event of late payment, that interest rate must be followed.
Just how late is late?
A small business’s payment terms are usually thirty days from the delivery of the goods or service provision.
The legislation says that a commercial debt becomes late thirty days after the service was provided or when the goods were delivered. This time limit also applies when the customer receives the invoice from the small business.
The interest rate
The amount that can be charged as interest is 8% above the Bank of England base rate. At the time of writing this article, the Bank of England base rate is currently 3%, which means that the total interest rate will be a hefty 11%.
The period in which this interest can be claimed is six years. So, if the debt has been outstanding for six years, interest can still be claimed on that outstanding debt.
How much can be charged in compensation?
How much can be charged in compensation depends on how much the debt is for. There is a scale of compensation that the small business can claim.
If the debt being claimed is less than £1,000, the amount of compensation that can be claimed in addition to the interest and debt is £40. Suppose the debt is between £1,000 and £10,000; then the sum of £70 can be claimed as compensation.
Where the debt is £10,000 or more, the sum claimed as compensation goes up to £100.
How do I claim the interest on the late payment?
There is no need for a separate invoice to be produced by the small business owner for the interest and compensation claimed. The claim can be made in a letter informing the supplier of how much is due.
The letter can include the sum that is due in interest and the compensation amount. It is also advisable for the letter to contain information about the interest and compensation owed and the invoice number for the debt due.
The letter can also include information on how the payment of the debt, interest and compensation is to be made and have details of whom the payment is to be made, by what date and how it is to be made (by bank transfer, for example).
Notice to customers
A small business doesn’t have to tell its customers that in the event of a late payment, interest under the act and compensation will be charged.
However, it is advisable to let customers know in advance that if there is to be a late payment, this will attract interest and compensation. This notice can be included in the small business’ terms and conditions or displayed prominently on their invoices.
Andrew Farrugia is an experienced contract lawyer at LawBite. He specialises in assisting startups and SMEs with their commercial and dispute resolution requirements. Find out how LawBite can assist you and advise you on the benefits of different business structures.
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