October 16, 2023
Businesses are within their rights to charge interest on overdue invoices. Integrating a clause on interest for late payments in your contracts ensures there's no ambiguity about consequences should a payment delay occur.
Clarifying the repercussions of late payments in your contracts is smart. This means agreeing on payment terms that align with both parties’ interests. For business-to-business dealings, the norm is settling payments within 60 days unless a fairer, extended period is mutually agreed upon.
Absent a specific agreement, in the UK statutory rights will kick in, granting you the ability to charge interest on late payments.
The definition of a "late payment" can vary. Pro tip: always issue a written invoice to formalise the debt amount, which strengthens your position if interest charges become necessary. Any interest applied, should be as stated in your contract.
Calculating the interest due isn't rocket science, thankfully. Importantly, any part payments from your client firstly offset the accrued interest, unless an alternative arrangement exists. Remember, interest is calculated on the total debt, tax (i.e. VAT) included, but you won't pay tax (i.e.VAT) on the interest itself.
It's courteous and legally sound to inform your debtor of your intent to charge interest on overdue payments, aligning with late payment legislation. Though verbal notice is possible, written notification is recommended for record-keeping.
Embedding your right to charge interest within your terms and conditions or contractual agreements can serve as a gentle push for clients to pay on time. Ensure your invoices detail the payment due date and interest implications post that date. Integrating interest claims into your credit control system is crucial. Upon crossing the payment deadline, notify your client with key details: the overdue status, the amount due, the invoice in question, how daily interest is calculated, and payment instructions.
If payments remain elusive despite your efforts, further actions, including enforcement or engaging a debt management company, might be necessary. Notifying your client about debt assignment is a must in such cases. Besides interest, you're entitled to claim fixed debt recovery costs, varying with the debt amount. Should your recovery costs exceed these fixed sums, you can claim the additional costs, provided you can justify them.
Charging interest isn't mandatory. Assess industry norms and the potential impact on client relationships before deciding. If late payments are a recurring headache, revisiting your credit control measures might be wise. For international clients, recovering interest may prove challenging, given the variance in global late payment legislation. Seeking expert advice is prudent in these cases.
Should a client contest the debt, understanding their concerns is your first step. Resolving disputes, especially those rooted in quality issues, might require external expertise to navigate. Keeping evidence handy becomes crucial as disputes escalate.
Our subject expert: Fayola-Maria Jack
Fayola-Maria Jack is a multi-award winning deal shaping and dispute resolution expert. She has shaped successful resolutions and out of court settlements for governments, multinationals, military, banks, and venture backed startups.
