Late payments from clients - Know your rights

Late payments can cause problems for any business, particularly to cashflow. Katie Edwards outlines the actions you can take.
 

If your business is, or could be, affected by late invoice settlement, thankfully there are various ways of getting your customers to pay on time. Despite your best efforts, however, you may find that some customers still end up paying late and that further action is necessary.

First, you are well within your rights to chase invoices. Although this may seem an obvious solution, it can be a very effective one. Most important, it brings the late payment to the attention of the customer. In addition, it will enable you to let them know that you will consider further action against them if payment is not received within a specific time frame.

Charging interest

If a payment is late, you have the right to charge interest on the debt. This can encourage rapid payment by informing a customer that the debt will increase if it is not settled promptly.

The right to charge interest is the result of the Late Payment of Commercial Debts (Interest) Act 1998, and it applies regardless of whether your customer contract or terms and conditions give you the right to claim interest. If you do not have a contractual rate of interest, the legislation allows businesses to charge 8% above the Bank of England base rate. This is set on a twice-yearly basis, and at the time of writing stands at 8.5%.

If you have a contractual rate, or decide to establish one for future use, it can be higher or lower than the statutory rate. The statutory rate will no longer apply, however, and to be able to rely on the rate you set, you must ensure it’s fair and reasonable.

You obviously also have the right to decide whether or not you actually charge interest. Many businesses wish to maintain relations with certain customers and so may decide that the only sum they wish to claim is the outstanding payment. However, this option may not be a commercially viable; there is no guarantee that your company will remain solvent if cash flow becomes problematic. You should always consider your approach on a customer-by-customer basis; remember, if one customer is persistently late, even the threat to increase their debt may encourage payment.

Debt recovery compensation

In addition to charging interest, if you do not have a contractual right to claim it, the legislation also gives you the right to claim costs of up to £100 on each overdue invoice for the recovery of late payments. If you decide to apply any such charges, you should notify the customer in writing. You should also send them a new invoice with the charge itemised as an additional amount and the outstanding total debt adjusted accordingly.

Failure to pay

If a customer still fails to pay despite chasing, you have the right to commence legal proceedings against them. Again, you will often find that the mere threat of doing so may be enough to make them pay.

If you choose this route, you should always write to your customer, outlining the full amount of the debt including any interest and debt collection costs that have accrued, and giving them further time to pay. A seven-day period is generally considered to be reasonable. In the same letter, you should also inform them that you reserve your rights to begin legal or enforcement proceedings if the debt remains unpaid.

Commencement of proceedings

If your customer still fails to pay, you may need to consult a solicitor to discuss starting legal proceedings. You have the right to bring a claim against the customer or, under certain conditions, to issue a statutory demand. 

Statutory demand  

You can issue a statutory demand, which gives your customer 21 days to pay the outstanding sum, if the amount owed is greater than £750.00 and the debt is not in dispute. If you issue a statutory demand and the debt remains unpaid, you then have the right to begin winding up or bankruptcy proceedings against your customer. The issue of a statutory demand is therefore often a catalyst to prompt payment.

In the event of winding up or bankruptcy proceedings, costs can increase rapidly – and there is still no guarantee that the debt will be paid in full. This is because your ranking in insolvency proceedings would be that of an ‘unsecured creditor’. Secured creditors take priority over unsecured creditors, meaning there may be no remaining funds for you.

Making a claim

You may issue a claim against your customer if payment is not received. Bringing a claim has the added advantage that no other parties are likely to be involved, so you will be able to claim the entire sum. However, taking legal action is usually considered a last resort, particularly because the outcome may be unpredictable and costs can be difficult to assess.

So you have a number of rights if a customer pays you late. If, on balance, court action stills seems to be the best solution, you should consider whether making a claim is cost-effective – it might be cheaper for you to write off small sums. Also, if the customer is likely to place large orders in future, you may want to give them further time to pay. Finally, before issuing proceedings you should always ensure that you have resolved any disputes over the goods or services you provided, as any disagreement could have a detrimental effect on your claim.

Key Points to Remember:

• If a payment is late, you have the right to charge interest on the debt
• Simply chasing an invoice can be the simplest and most effective way of achieving rapid payment
• Adding interest and charging for debt recovery costs can accelerate settlement
• If your customer is made bankrupt, as an unsecured creditor you might receive nothing
• Think hard before going to court: costs are unpredictable and the outcome is uncertain.
   

For further information or advice please contact Katie Edwards on: 0161 234 8717 or email katieedwards@georgedavies.co.uk