Late payment. How to manage debts.

As a one man limited company, working via an agency, or working direct with a client, you may at one time or another experience the joys of 'late payment'. Not only can this cause cashflow problems, but it can also lead to breakdown of your relationship with the client/agency if invoices are not paid on time. So, what rights do small businesses have when it comes to collecting unpaid fees?

The Late Payment of Commercial Debts (Interest) Act 1998 gives small businesses the statutory right to claim interest on late payments from other businesses. This Act, originally introduced in November 1998 allows small firms to claim interest for late payment from large businesses (Over 50 employees) and public sector organisations. From November 1st 2000, this was extended to allow small businesses to claim statutory interest from other small businesses.

So, when does a payment become late? Late payment starts from the date when the agreed payment period between the contractor company and the client/agency (as stated on your invoice). If not credit period was stated, the Act specifies a 30 day payment period after which interest becomes payable.

The interest rate under the Act is the Bank of England base rate plus 8%. You are fully entitled to quote this on your invoices - something like:

"Payment is due within 30 days of the invoice date. We reserve the right to claim statutory interest at 8% above the Bank of England base rate for late payment in accordance with the Late Payment of Commercial Debts (Interest) Act 1998."

Despite the improved provisions for small businesses to claim late payment interest from larger companies, the main concern for many contractors is that they don't want to upset the client/agency and that chasing payment may damage their business relationship.

In the first instance, most experts recommend chasing up the original invoice by phone or letter following the expiry of the initial (typically 30 day payment period). After this point, interest is chargeable under the terms of the Act. If settlement is still not forthcoming, a solicitor may need to be hired to write to the debtor.

Dun and Bradstreet suggest the following debt tracking policy:

  • Before supply - Get customer's acceptance of your terms and conditions of business
  • Month end - Issue written statement of account
  • 30 days - Payment now due reminder
  • 45 days - Phone call to customer accounts payable department - define and solve any reason for late payment. Issue Final Demand notice
  • 60 days - Phone call to customer - identify any outstanding reason for payment failure. Letter outlining that account will go on stop at 70 days
  • 70 days - Letter confirming account on stop
  • 80 days - Solicitor's letter outlining intention to proceed with county court action if payment not received within 7 days
  • 90 days - Instruct solicitors to commence county court action

Thankfully, the vast majority of late payers settle outstanding debts after the second reminder. To protect yourself, you should always quote the settlement date (30 days is typical) and the Late Payment terms on your invoices. If your main concern is keeping a good relationship with the client/agency, chances are you will be paid following reminders made by phone or letter if necessary (even if payment is late). But the law does protect small businesses, so you are fully entitled to hire a solicitor to obtain payment, together with interest owed, as stated on your invoices.

One way you can cut yourself out of the 'debt risk' cycle is to offload this responsibility onto a 'factoring' company - this is an increasingly popular method for contractor companies to manage their debts and improve their cashflow. A factoring company works by buying your invoices in return for up-front payment of an agreed percentage of the invoice value. Therefore, you effectively give the percentage to the factoring company, but receive the remainder up front.

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