Are you charging late payment interest?
Small and medium-sized companies are owed nearly £40bn as a result of late payments, threatening their future, recent research has found.
With the average company waiting for £38,186 in overdue invoices, the ongoing issue of late payment is clearly taking its toll on the cash flows of businesses across the country. But with businesses able to charge late payment interest to help cover the cost of debt collection why do so many choose not to?
The Late Payment of Commercial Debts (Interest) Act gives businesses the right to charge their customers compensation and statutory interest on any overdue invoices to help cover the debt collection costs involved.
But according to our most recent survey only 18% of businesses currently charge interest on late payment despite having the right to do so.
An interest charge of 8% plus the Bank of England Base Rate can be levied as soon as the debt can be classed as overdue, whilst businesses are also eligible to claim debt collection costs of between £40 and £100, depending on the value of the debt. If you’re unsure of what you’re able to charge you can use our late payment calculator to see how much you are entitled to.
The most common reasons given by businesses for not charging interest were that customers would just ignore it and the potential risk of losing customers.
It can be hard to strike the right balance when collecting money from customers, especially where there is a long standing relationship or you are hoping for repeat business. However, it’s important to remember that you aren’t doing anything wrong.
Don’t let customers making threats to take their custom elsewhere deter you from pushing for payment and adding on interest that you are rightfully owed. Especially with persistent offenders, charging interest may act as a deterrent in the future. Although it’s a hard line to take, it is also worth weighing up whether you want to retain a customer that continually fails to pay on time.
Remember, credit control need not be a daunting process, and in fact is one of the most important everyday business tasks to get right. Take a look at our credit control tips section to check that your business is doing all it can at each stage of the order-to-collections process to get paid.
Does your business charge late payment interest? Please share your experiences in the comments below.