Does your business charge late payment interest on overdue invoices? It’s one of many useful tools that businesses have in their fight against late payment, yet many fail to utilise it. According to research from the Federation of Small Businesses (FSB), 84% of small businesses have been paid late for a product or service. Not only is it creating a cash flow headache and prohibiting businesses in their everyday activity, it’s a problem that is forcing as many as 50,000 companies to close down each year.
Just one late payment has the potential to cause severe cash flow consequences, so why aren’t small businesses utilising all the tools available to them to protect their cash flow and recover what’s rightfully theirs? The Late Payment of Commercial Debts (Interest) Act is a piece of legislation that gives businesses the right to charge interest on debts that have exceeded credit terms. An interest charge of 8% plus the Bank of England Base Rate applies from the day the debt becomes overdue, whilst debt collection costs of at least £40 can be claimed, depending on the invoice’s value.
But, even with the potential consequences of late payment looming over them, many small businesses refuse to use this credit management strategy as a way of encouraging prompt payment from customers. The most common reasons we hear from our clients for not charging interest are that customers would just ignore it, whilst there is also a fear of losing customers.
Whilst it’s understandable that these factors would be a concern for small businesses, it’s important to remember that you aren’t doing anything wrong and have every right to charge this additional fee. By refusing to pay on time your customer has put their cash flow needs ahead of yours.
Often, just informing your customers of this statute should give them an added incentive to settle the invoice as soon as possible. It can be hard to strike the right balance when collecting money from customers, of course, especially where there is a long-standing relationship or you are hoping for repeat business.
An overly heavy-handed approach can damage this relationship, but there are times where this is the only option to get back what you’re owed.
Although charging an additional fee is a hard line to take, it is worth weighing up whether you want to retain a customer that continually fails to pay on time. Especially with persistent offenders, charging interest may even act as a deterrent in the future. In addition to compensating your business for the adverse effect late payment is likely to have on your business’s cash flow, the money could be used to cover the costs of referring the debt to a commercial debt collection agency or for taking the customer to court.
Whilst each individual case should be considered separately, late payment interest is a useful tool in the fight against late payment.
Alex Hilton-Baird, Managing Director of Hilton-Baird Collection Services
To find out how much you could charge for overdue invoices click here to view the late payment calculator