Small businesses: how to chase late payments

For small businesses, customers in arrears are a big headache. Know your rights when chasing late payments.

Financial problems

If all else fails, get the Small Business Commissioner involved

For small businesses, customers in arrears are a big headache for small firms. Know your rights when chasing late payments.

Late-paying big businesses could be fined for persistently failing to settle small contractors' invoices on time. But while the government says it is determined to beef up the powers of the Small Business Commissioner, which can intervene in late-payment disputes, small businesses are also being urged to take a tougher line themselves.

In particular, small businesses have a legal right to charge penalties when customers pay their bills late. While that may feel uncomfortably confrontational, and certainly shouldn't be a default option, hitting late payers in the pocket can be a powerful way to concentrate minds.

The law is very clear on small businesses' rights. You can claim both interest charges and debt recovery costs if a firm is late settling your bill. "Late" is defined by the payment terms you agreed when you made the sale. However, if you didn't explicitly set a timetable, the law provides a fall-back position. In this case, your payment will be late if your customer does not pay it within 30 days of receiving your invoice, or within 30 days of you delivering the goods or providing the service, if later.

The law also defines what you can charge. "Statutory interest" is the prevailing Bank of England base rate plus eight percentage points, so it currently stands at 8.75%. This is an annual rate, but you have to charge it daily. On a £10,000 debt, for example, the annual interest bill would be £875, which works out at about £2.40 a day. You multiply this sum by the number of days late.

You are also entitled to charge a fixed sum to cover the costs you incur while chasing the payment, not least the cost of your time. This sum varies according to the size of the debt, from £40 for late payments worth less than £1,000, to £100 for bills of £10,000 or more.

To claim these interest charges and costs you'll need to issue a new invoice to your customer detailing what is owed. The customer may choose to accept this invoice, but if not, you may need to take legal action to force it to pay. This sounds daunting, but for claims of less than £100,000 you can use the streamlined County Court system. You can even make your claim online at gov.uk/make-money-claim.

Whether or not you choose to go down this road is a judgement call: you know your customer best. And another option is to ask the Small Business Commissioner to get involved; it has an increasingly strong record of forcing late-paying big businesses to pay up.

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