Ensuring customers pay you on time

There are various ways of encouraging your customers to pay on time. However, despite your best efforts, you may find that some still end up paying late.

If this happens, you should contact the customer in question to try and resolve the issue and review your procedures to reduce the possibility of others paying late in future.

Note that you have rights under late payment legislation to add interest and debt recovery costs onto late payments. You can exercise these rights at your discretion.

Purchasers cannot contract out of late payment legislation and cannot, for example, deny the supplier their right to, for example, charge statutory interest.

This guide looks at the various ways to manage late payment. Your choice may depend on who the debtor is, the size of the debt and how late the payment is.

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When does a payment become late?

You can agree any credit period you want with customers but you should agree the payment period before the transaction takes place. Don’t assume your usual terms apply as the payment period should be part of your negotiation on pricing and is the period agreed between parties. This agreement can be verbal but it should preferably be in writing.

Industry standards for payment tend to be net monthly – that is, payment at the end of the first full month following receipt of the invoice. These terms are standard as they allow a business to actively plan payments. However, you should negotiate your own terms and price your services accordingly.

Where there is neither an agreement in place nor custom and practice in operation, the law sets a default period of 30 days.

This period starts from whichever of the following is later:

• the date on which the goods are delivered or the service is performed
• the date on which the customer receives notice of the amount of the debt

Purchasers cannot contract out of late payment legislation – ie they cannot deny the supplier their right to, for example, charge statutory interest once a payment is overdue.

Prompt Payment Code

The Prompt Payment Code (PPC) is a joint initiative of the Institute of Credit Management (ICM) and the Department of Business, Innovation & Skills (BIS) seeking to identify payment exemplars across both the private and public sectors.

Businesses that sign up to the code commit to paying their suppliers on time and to providing clear guidance on payment procedures. Signatories are only allowed to join the Code if they are supported by supplier references. The Code is endorsed by several major banks and business organisations. Businesses that have successfully signed up to the code can display the PPC logo. Find information on PPC on the ICM website – Opens in a new window.

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Reducing the risk of late or non-payment

To reduce the chances of late or non-payment, you could:

• Make credit terms and conditions clear – see the page on setting terms and conditions in our guide on invoicing and payment terms.
• State an intention to impose your rights under the late payment legislation in all contracts and invoices – eg “We will exercise our statutory right to claim interest and compensation for debt recovery costs under the late payment legislation if we are not paid according to agreed credit terms.”
• Don’t supply any goods or services until you are satisfied with the credit checks.
• Quickly issue invoices that are clear and accurate. Include only useful information – eg order number, payment terms, due date, delivery date and method, unit cost and total payable etc. Email invoices or use first class post. You should reference the late payment legislation and the additional costs of paying beyond the agreed date.
• Use a computerised credit management system, which will help you keep track of customers’ accounts and generate reminders when payments are late.
• Have a collection strategy – eg telephone ahead of due dates to check that payment is in progress, or send reminder letters. Send emails/faxes if your telephone calls are being diverted or letters being ignored. If necessary, organise visits from sales staff and/or direct payment requests to more senior staff than normal.
• Set monthly targets – put together a payment timetable and ensure that you have staff who can devote their time to collection.
• Use an electronic payment tool – read about the electronic payment tool on the Electronic Payments website- Opens in a new window.
• Ensure your staff are properly trained in credit management and debt recovery.

You could also take out:

• credit insurance – to cover you if you have a bad debt due to a customer going into insolvency
• legal expenses insurance – this covers the costs of recovering debts through the courts

To improve cashflow, you could also use a debt factoring service. This is where you effectively ‘sell’ your invoices to another company – see our guide on factoring and invoice discounting: the basics.

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When to charge interest on late payments

You have a statutory right to claim interest on late payment, as well as a contractual right to claim interest if you have specified this in your terms and conditions.

Purchasers cannot contract out of late payment legislation – ie they cannot deny the supplier their right to, for example, charge statutory interest.

Should I charge interest on a late payment?

You can charge interest on all late payments. However, even if you indicate in your terms and conditions that you will charge interest on all late payments, it is up to you whether you actually do so or not.

You should address each debt on a case-by-case basis and:

• consider the relationship with the customer
• get the opinion of customer-facing staff
• assess your credit management system

With persistent offenders, you may need to start charging interest to act as a deterrent in the future.

What rate of interest should I use?

Rates for calculating interest are called reference rates and are fixed for six-month periods. The Bank of England base rate on 31 December is used as the reference rate for debts becoming overdue between 1 January and 30 June of the following year. The rate in force on 30 June is used from 1 July to 31 December.

You can calculate the interest payable on overdue bills by taking the relevant reference rate and adding 8 per cent.

Alternatively, you can set a contractual rate that may be higher or lower than the statutory rate. If you set a contractual rate, the statutory rate no longer applies.

Interest should be charged on the outstanding gross amount inclusive of VAT. No VAT is chargeable on the interest itself.

Charging interest

If you don’t already charge interest, you may need to:

• adapt your credit management and billing systems
• amend invoices and terms and conditions so that they state you reserve the right to charge interest – even if you don’t intend to do so under normal conditions
• notify customers of your plans and check that they understand the new terms and conditions
• contact habitual late payers to discuss how they’ll be affected

Make sure invoices include an agreed payment date so customers know when interest will start being charged – let customers know if interest starts to accumulate. Your invoices should also state that you will exercise your right to claim statutory interest (at 8 per cent over the current Bank of England base rate) and compensation for recovery costs under late payment legislation if money owed is not received by the agreed date and under the agreed credit terms.

Before charging interest, you could issue a letter stating that the payment is late and if it is not paid within, say, seven days, interest will be charged.

Present the customer with a final receipt once the interest and the original sum have been paid, outlining details of interest charged.

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Claiming debt recovery costs on debts and payments

As well as charging interest – see the page in this guide on charging interest on late payments – under late payment legislation you can also claim costs for the recovery of late payments. There is an automatic and fixed compensation charge shown below, but you can also charge any reasonable additional costs of recovery where they exceed the basic compensation rate.

Amount of the debt	Debt recovery cost you can charge
Up to £999.99	£40
£1,000 – £9,999.99	£70
£10,000 or more	£100

However, before applying the charge, you should:

• consider your relationship with the customer
• get the opinion of customer-facing staff
• assess your credit management system
• find out the general industry practice

If you decide to apply the charge, you should notify the customer in writing. You should also send them a new invoice with the charge itemised as an additional amount and the outstanding total debt adjusted accordingly.

Purchasers cannot contract out of late payment legislation – ie they cannot deny the supplier their right to, for example, charge statutory interest.

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Taking non-court action to collect debts

Court action should be seen as a last resort. Before you take court action, you should consider the alternative methods of recovering debt outlined below.

While you consider the options, you should continue trying to recover the debt using the usual methods, eg telephoning the debtor to remind them that the payment is now overdue.

Involvement of one of the following may also assist:

• An accountant – some offer debt collection services as well as advice on credit control and debt collection procedures.
• A solicitor – some solicitors specialise in debt collection. They can issue powerful letters in a short space of time. Agree a fee for this service in advance.

Another alternative is to use a debt collection agency.

The advantages of using an agency are that:

• They have the time, expertise and resources needed for the job.
• It can be a fast method of recovering debts so will save you time.
• If the debt collection agency is polite and professional, you may retain the customer – assuming you want to. This is unlikely to be the case if you take legal action.
• The agency can instruct solicitors on your behalf if the customer still refuses to pay.

The disadvantages are that:

• an agency can be costly – the commission on the money recovered is typically 8 to 10 per cent for commercial debts
• you may lose the customer
• if the agency is heavy-handed, your reputation may be damaged

It is advisable to check that your agency is registered with the Credit Services Association (CSA) on the CSA website – Opens in a new window.

A further alternative is for you, your debt collection agency or solicitor to issue a statutory demand, promising an application to court for the formal winding up of the customer’s business if payment is not made within 21 days.

Finally, you could consider:

• negotiation
• mediation
• conciliation
• arbitration

See the page on deciding whether to make a claim in our guide on how to recover debt through court.

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Taking court action to collect debts

Taking legal action to recover your money should be a last resort.

Therefore, consider all other alternatives before going to court – see the page in this guide on taking non-court action to collect debts.

If court action still seems the best solution, consider whether making a claim is cost-effective. It might be cheaper to write off small sums. If a customer is likely to place large orders in future, it may be better to let things lie if only a relatively minor amount is in dispute.

If you decide to take court action, make sure you have resolved any disputes over the goods or services you have provided. If you don’t do this, the debt will be difficult to recover. You also need to make sure that customers have the means to settle. If they are bankrupt or in liquidation, your debt is probably irrecoverable.

For sums that are under £100,000, you may be able to make a claim using the HM Courts & Tribunals Service Money Claim Online. For more information you can read our guide on how to recover your debt through court: Money Claim Online.

In Northern Ireland, you can use an online service for making a claim through the Small Claims Court. Find out what services are available online from the Northern Ireland Courts and Tribunals Service website (registration required)- Opens in a new window.

Debts of up to £5,000

Debts of up to £5,000 are dealt with by the small claims track at your local county court. Find your local county court on the HM Courts and Tribunals Service website- Opens in a new window. This offers a quick and inexpensive way of making claims for unpaid debts, as you don’t have to employ a solicitor.

In Scotland, claims are dealt with by the Sheriff Court. Find information on how to make a claim in Scotland on the Adviceguide website- Opens in a new window. Find your local Sheriff Court on the Scottish Courts website- Opens in a new window.

The maximum amount differs in Northern Ireland

Debts over £5,000

Claims from £5,000 to £25,000 must be issued in a county court, while claims of more than £25,000 can be issued in the High Court. It’s advisable to get legal advice about this. See our guide on how to choose and work with a solicitor.

In Scotland, debts over £5,000 are raised as ordinary cause actions. If your debt is particularly large or complex, you might want to raise proceedings with the Court of Session in Edinburgh.

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