The Late Payment of Commercial Debts (Interest) Act 1998 is often considered a lifeline for many small businesses in the UK, as they chase and battle late and outstanding invoices.
One of the guidelines within the act is that of Statutory Interest, interest that can be applied to an invoice as soon as it becomes overdue.
Adding to the final amount, encouraging businesses to pay on time and sooner to avoid such penalties, and supporting small business cash flow, Statutory Interest can be an essential tool.
In this post, we look at how to calculate statutory interest, why it’s important, and how to manage overdue invoices.
If your business or credit control team requires assistance with late payment collection, make sure to call our professional, experienced team today.
Helping businesses keep their finances on track, we have a high collection success rate, we help to maintain client-supplier relationships, and we help build robust credit control practices to limit late payments altogether.
Charging interest on invoices
Late payments are not only frustrating for businesses, but they also severely and negatively affect cash flow, which in turn impacts everyday operations and growth opportunities.
To help businesses tackle late payments, small businesses do have the right to charge additional interest as soon as an invoice becomes overdue (this is typically after 30 days for public sector suppliers, and after 60 days for private business transactions).
An invoice is considered late in two circumstances:
- The invoice is late 30 days after the customer receives the invoice.
- The invoice is late after the date you delivered the goods/provided the service.
Of course, longer payment periods can be negotiated; however, these must be agreed upon and fair for both parties.
Statutory interest rate
The current statutory interest rate a business can charge on an overdue invoice is 8% plus the Bank of England’s base rate. (Note: if a different interest rate is stated in the contract, you will have to abide by the stated one.)
Charging interest on invoices can take two forms: fixed or variable. For example:
Fixed interest – you can set the percentage in this instance, for example, 5%. This would mean that 5% per annum above the Bank of England base rate is applied from the moment the invoice becomes overdue.
Variable interest – in this instance, if we stay with the 5%, at a variable interest, this means 5% per annum above the Bank of England base rate from time to time.
Both applications of interest have their own pros and cons, and it is important for you to understand which one would work best and be most convenient for your business.
To help you understand and calculate interest properly and avoid mistakes, further errors and delays, use the Small Business Commissioner late payment interest calculator.
This online calculator will ask you a series of questions and provide you with detailed information, allowing you to see how much interest and late payment compensation you are entitled to claim.
Statutory interest on late payments
When charging interest on invoices, it is vital that this is communicated to your customer and it is applied correctly, as if not, you could be the one who faces further action and challenges.
For example, terms must be built into contracts on all qualifying debts.
Qualifying debts, therefore, constitute their obligation; they are under contract to pay the whole or part of the price.
This is important to note, as a term like the one mentioned above (adding Statutory Interest) cannot be applied when a contract already contains provisions relating to late payment penalties, ie, if you have your own late payment penalties outlined and pre-agreed with your customer.
In all cases, after you have added the interest to the outstanding invoice, you must then issue the new invoice to your customer. The invoice should include all relevant details AND the new amount now owing, along with a description of what you are applying for and why.
It may also be applicable at this stage to reference any correspondence with your customer.
We always advise keeping all documentation together and in order so details can be found with ease if late payment progresses to debt collectors and even further, court.
Having robust credit control systems in place allows you to monitor and stay on top of your cash flow and invoice management practices.
Charging interest on invoices
As well as mandatory statutory interest, businesses are also able and quite within their rights to claim for debt recovery costs too.
This means that you can outsource unpaid invoices to a professional team, who have experience and proven, tried and tested debt collection practices that work.
To speak to a member of the Direct Route team today, call +44 786 0197 476 or email your enquiry to memberbenefits@directroute.co.uk, and we’ll make sure to get back to you.