What do you do if you send your bills out on time, only to find that your customers are proving reluctant to cough up? Charge them interest, says Adam Aiken, finance expert.
Many business owners are unaware that you are allowed by law to increase the bills of third parties that fail to pay you on time.
The Late Payment Directive, which was introduced by the Government to comply with European Union law, can help you in your dealings with both public and private sector partners.
The Government says that “debtors will be forced to pay interest and reimburse the reasonable recovery costs of the creditor, if they do not pay for goods and services on time”.
The accepted timeframe for payment is 30 days for public authorities, and 60 days for businesses.
If you have already agreed different terms with your debtors, that’s fine, but any terms must be fair to both parties. A multinational that “negotiates” a 180-day payment agreement with its army of small suppliers would be deemed to have broken the terms of the directive.
As far as timings are concerned, the clock starts ticking as soon as the customer receives the invoice, or when you deliver the goods or provide the service – whichever is later.
How much can I charge?
You can charge something called “statutory interest”, which is the Bank of England base rate plus 8%. Statutory interest at the moment is 8.5% but it could easily rise well into double figures when the base rate increases.
Working it out is easy. If you are owed £2,500, you multiply the sum by 0.085, which gives an annual interest bill of £212.15. Divide this by 365 to give you a daily rate of just over 58p. So, if your invoice is 30 days overdue, you can re-bill the customer and add an extra £17.40. (If you agreed a lower interest rate for late payment with your customer, you can’t then apply the statutory interest rate instead.)
You can also charge a fixed fee to help meet your recovery costs. If the debt is up to £999.99, you can add another £40 to the bill; between £1,000 and £9,999.99 add £70; and on sums of £10,000 or more, the fee is £100.
If you decide to apply interest and fees for late payment, make sure you send a new invoice for the increased amount. This will have the added bonus of being a permanent reminder to your tardy customers, and, if someone else (such as a senior manager) sees it, it might lead to a more prompt payment next time.
Things to remember
It is important to get paid as soon as possible but try not to burn too many bridges – you don’t want to fall out with those you do business with. Be firm when you chase up an unpaid invoice, but be polite.
Also, consider making any follow-up requests for payment over the phone as it is harder to ignore.
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