The late payment of Commercial Debts (Interest) Act 1998 gives businesses the legal right to charge interest on overdue bills and invoices. It has being gradually implemented.

When and how can you use it?

At first it only allowed small businesses (Defined as businesses with fewer than 50 employees) to charge interest on monies owed by large businesses (all the others). On 1st November 2000 it was extended to include money owed by other small businesses. On the 7th August 2002 big businesses were given the same right. So even if you don't intend to use the Act yourself, be aware that some of the people you owe money to may be thinking using it.

What does the Act allow me to do?

The Act allows business to charge interest on late payments

It defines a late payment as one where the agreed credit period given by the supplier has been exceeded. In other words, the invoice due date came round but payment was not forthcoming.

The Act specifies a default period of 30 days where no credit period has been specified. The supplier has the right to specify a longer period than this, according to his own business practice. He can even specify no credit in the original contract, in which case interest starts to accumulate once the goods have been delivered or the service has been performed.

You have the right to charge interest at 8% above Bank of England base rate. So if the base rate was 4% on the day payment became due, late payment could be charged at the rate of 12%.

How do I use it?

Legally, you simply have to tell the debtor that you intend to charge interest and you could do this by telephone. In practice you should also put it in writing, including the following information:

a) The amount owed-including interest-at the time the letter was sent and continuing daily interest rate

b) Original invoice details

c) Full contact and payment details including method of payment

It is also a good idea to use the Act as a deterrent. You can do this by stating that you reserve the right to impose interest under the late payment Act on all written communication with the customer including invoices, contracts, bills of sale etc. then, as the due date approaches you can drop them a note to remind them of the impending penalties they face. This does not have to be heavy handed but can be offered as customer service.

Clearly establishing it as part of your normal business practice makes it less personal. It also gives you a negotiating tool with your customers when you are chasing payment (e.g. suggest you drop the charge if they pay within the week) or after new business (e.g. waive the charges for a favoured customer and tell him/her that you are doing it.

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Bradley James Group