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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
Pension warning: one in five don’t know how much is going into their pensionHow to check your pension contributions and why it matters
-
50,000 power of attorney applications rejected – how to avoid common mistakesA freedom of information request shows that thousands of lasting power of attorney (LPA) applications are rejected due to errors. We explain how to avoid mistakes and reveal tips to make the process as straightforward as possible
