When your clients do not pay you on time not only does this create cash flow problems, it increases the risk of not being paid at all and can damage the working relationship.
Cash flow can be a very personal issue for freelancers, contractors and small businesses. Not being paid, or being paid late can sometimes mean the difference between making and missing this month’s rent, or even being able to afford to continue running your business.
There has been a statutory right to charge interest for late payment for small businesses since the late payment legislation in 1998. This was primarily for larger firms then from 2002 smaller firms too. This right applies to sales to business and public sector customers only and there is no statutory right when selling to consumers.
The amended late payment legislation came into force on 16 March 2013 which implemented an EU directive with the aim to reduce the culture of paying late. These new rules meant debtors will be forced to pay interest and reimburse reasonable debt recovery costs if they do not pay on time.
When you enter into a contract with a client, one of the key clauses that should be included within the contract will be the payment terms. Typically, the contract should specify after how many days from the date of the invoice the payment should be made.
Sometimes you may agree to their terms and in this case you may expect to be paid within seven days of invoice, possibly 30, sometimes they can even go as high as 60-90 days. (I would strongly advise negotiating this.)
If you do not have terms in place then the law says that, the payment terms are assumed to be 30 days from invoice.
This means that if you send an invoice dated the first of the month, the payment should be expected to arrive by the 30th day of that month.
As stated you have a statutory right to claim interest on overdue payments, as well as a contractual right to claim interest if you have specified this in your terms and conditions.
Even if you have indicated this in your T&C’s, it is up to you whether you actually do so or not.
You should address each debt on a case-by-case basis and:
If you do decide to charge interest then the first step is to work out how many days the payment is late. Begin counting the late period on the day after the payment is due and stop counting on the date you are raising the new invoice.
The interest rate you charge should be reasonable and this amount should be specified in your terms. Where no interest rate is specified, this will be set at a rate of 8% above the Bank of England base rate.
Firstly, multiply the amount owed by the rate of interest for the whole year.
E.g. £1000 debt x 0.75% (Base Rate) + 8% = £87.50
Divide the annual interest by 365 to get daily interest = £0.24
Then the daily interest (£0.24) x the number of days late (e.g. 30) = £7.20
This ranges from £40 for debt up to £999.99, £70 for dent of £1,000 to £9,999.00 and £100 of £10,000 or more.
If the cost of chasing the late payment is greater than this fixed fee, you can also claim back the extra expense as ‘reasonable costs’, which should mean you are never left out of pocket for chasing a payment.
You may consider passing on the debt to a company, or liaising with a debt recovery service to recover the debt.
A conversation with us can help too, by making sure all your processes are correct and your terms are clear and watertight.
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