14th September 2017

Compensation for Late Payments of Commercial Debts

Cashflow can be the difference between success and failure in business. But if late payments are giving you unnecessary business headaches, the law is on your side.

Cash is King

Cashflow management is crucial for any business, especially small- and medium-sized enterprises. It can be even more difficult if you have larger customers; not only do they often impose long payment terms, they can sometimes be very tardy about coughing up.

Unfortunately, this issue is not new, which is why legislation was introduced in 1999 to try and give creditors a bit of muscle.

Legal protection

The Late Payments of Commercial Debts (Interest) Act 1999, entitles creditors to claim 8% over the Bank of England Base Rate for debts arising from business-to-business transactions, plus a fixed compensation fee (which varies according to the amount of the debt, but up to £100).

The act is underused, but it enables you to claim the interest and compensation if:

The debt relates arises from a business-to-business transaction;

The debt is not subject to a different contractual rate of interest; and

The debt is or has been outstanding past any agreed date for payment; where there isn’t an agreement on this point, past 30 days.

If your contract doesn’t say anything about the interest applicable to late payments of invoices, the Act is likely to apply to the Debt.

Calculating interest

Under the Act, interest is calculated as simple interest on a daily rate. To keep the maths simple, let’s assume you have a commercial debt of £1,000 which been outstanding for 100 days. This would enable you to claim interest as follows:-

£1,000 x 8.25% (8% + 0.25% – Bank of England Base Rate) = £82.50 (yearly interest)

£82.50 / 365 days = £0.23 (daily interest)

£0.23 x 100 days = £23.00

In addition, you would be able to claim compensation; for a debt between £1000 and £9,999.99 this is £70.00

Total that could be claimed = £93.00.

If late payment is making your cash flow difficult, remember that you do have legal protection to help you reclaim it, as well as the option of pursuing insolvency proceedings.

Alex Lee

Alex Lee