The late payment of debts can cause serious cash flow issues for businesses and can all too frequently result in small businesses being forced to increase their own bank borrowing just to survive the period between invoicing and payment.

In recognition of these problems the Government has implemented legislation in the form of The Late Payment of Commercial Debts (Interest) Act 1998.

This gives businesses a statutory right to claim interest if a commercial client fails to pay its bills on time. It applies to all contracts for the sale and supply of goods or services, where both the supplier and purchaser are acting in the course of a business, even if the contract is silent on the issue of whether interest is payable in the event of late payment.

The Act was originally intended to come into force in stages but, as a result of a recent EC Directive, it is now the position that all businesses, irrespective of size, can claim interest for the late payment of commercial debts. Businesses also have the right to claim reasonable debt recovery costs.

The rate of interest that can be claimed is the Bank of England base rate plus eight per cent. Interest can only be claimed if court proceedings have been commenced to recover the debt, although it can of course be factored into negotiations with customers. In light of this, any prudent business should review its terms and conditions to ensure that they both make provision for a remedy in the event of late payment and so that they are also compatible with, and take advantage of, the provisions in the Act.

Given that the statutory rate of interest under the Act is substantially higher than the highest rate of interest which a supplier would normally specify as a contractual rate of interest in order to avoid the risk of the provision being held invalid as a penalty, it may well be worth a supplier not specifying an actual rate of interest for late payment and instead relying on the rate set out in the Act.

Hopefully if combined with the operation of an efficient credit control process, the effect of this piece of legislation will serve to reduce the period of outstanding debt for businesses.

For more information, contact Withy King solicitors on