Late Payment of Commercial Debts
by Jo Shaer, on October 15, 2012
The late payment of commercial debts is a major factor in the failure or success of many SMBs with larger businesses using some small to medium enterprises as their own personal interest-free loan provider.
Now, most of my clients are very good and pay almost immediately but there are one or two who insist on 30 days, which is fine so long as I know because I can provide for that within my own cashflow arrangements. But there are one or two who claim financial embarrassment and so do not pay... for months on end.
Why it is important to have terms and conditions running alongside your invoices
Other, more experienced, business owners looked askance at me when I revealed that I had only recently started using contracts. The problem is that if you don't set out your terms in full at the outset, then unscrupulous types will set about to take advantage of your good nature.
In my business, it is hard to take back what you have already done and a lot of what I do is based on trust with a small deposit payment up front and the balance due when I have completed the work. Sadly, this cannot go on for new businesses because of the behaviour of others. Now, I have to charge a much larger deposit before I do anything in order to cover myself for future defaults.
Can I charge interest on late payment of commercial debts?
Well, according to the Business Link website, it would appear that I can.
Whilst the Microsoft invoicing system talks about 1% per month, I felt it was important to adhere to British advice on this. So, I have amended my terms and conditions to include a paragraph on late payment.
For invoices which are raised after 7 August 2002, I am allowed to change 8% above the Bank of England Base Rate that was in force at the time the invoice was issued. So, for all my outstanding balances, this would have been 0.5%.
I have to take the amount owed and multiply it by 8.5%.
So, for example, I have an amount owing of £500 - there is no VAT on this as I am not registered for that tax.
£500 x 8.5% = £42.50
£42.50 divided by 365 = 12p per day
The debt is overdue by 60 days.
So 60 x 12p = £7.20
I am allowed to add an additional £7.20 to the original payment.
However, to compensate me for my trouble, I am also allowed to add a late payment amount.
This has been worked out as follows:
For balances up to £999.99, I can add £40
For balances £1000-£9999.99, I can add £70
For balances over £10,000, I can add £100.
I really don't want to have to do this but, for persistent non payers, it would seem to be the only way to make them understand that I mean business. And so I have, reluctantly, added the clause to my business terms and conditions which now go out with every invoice.
For help and advice if you're struggling with persistent late payers or a commercial debt which looks like it is not going to get paid at all, there are experts who can help with the legal side.
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