How to Deal with Late Payment

Eight out of ten companies habitually pay their bills late. This has devastating consequences for British businesses - 10,000 companies go bust each year because of late payment.

So what can you do to make sure you get paid on time?

A very basic rule is to make sure your terms of trade are clear and that your customers have seen it. It’s amazing how many businesses supply goods and services with a verbal agreement only. If your terms are poorly written or communicated it can be difficult to pursue bad debt. You may want to consult a solicitor when setting down your terms.

Terms should include:

• Price
• Specifics of delivery
• Payment terms – if no credit period is agreed with your customers the law allows 30 days.
• Your right to charge interest on late payment and claim compensation for recovering the debt.

How to make sure you’re not paid late

If you think a customer could have problems paying, you could insist on part-payment up front for your services and the rest as an invoice. Or you could offer a reduction if payment is within the 30-day period.

If you find that you’re spending a lot of your valuable time chasing late payers, a factoring company could help. In short, they ‘buy’ the invoices owed and collect the outstanding debt for you. Research has shown that creditors are more likely to pay a factoring company.

How to recover debt

Since November 1998, small companies have been able to charge business customers interest on debts they pay late. The measure was part of a Government campaign to change Britain's late payment culture

Small businesses may charge other small businesses interest at 8% over base rate. So if the base rate is 5%, you can charge interest at 13%. Rates for calculating interest are fixed for six-month periods. The base rate at 31st December is used for debts becoming late between 1 January and 30th June, and the rate in force on 30 June is used from 1 July to 31st December. It is important to remember to use the base rate in force at the end of the day on which the contract says payment is to be made.

Further action

Ultimately you could pursue your non-payer through the courts (including the Small Claims Courts for amounts up to £5,000) though it's better to chase it up before it gets that far.

Legislation also allows you to separate the interest from the principal debt so you can pursue the interest alone even if the big company pays the initial bill.

• See UKNetGuide’s Guide to Factoring