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For many small businesses, late payments are not only frustrating, but threaten your cash flow and the health of your business going forward.
If all else fails, you have a legal right to charge interest on late payments. This interest is known as statutory interest.
If you’ve agreed a payment date for when your money is due, the payment is considered late after 30 days for public authorities and 60 days for other business transactions. If you haven’t agreed a payment date with your client or customer, then the law dictates that payment is late 30 days after:
The date that the customer receives the invoice
The date you deliver the goods/provide the service, if this is later
You can agree to a longer payment period for business transactions, as long as it’s fair to both parties.
What is the statutory interest rate?
The interest you can charge a business for paying late for goods and services is 8% plus the Bank of England base rate for business-to-business (B2B) transactions. However, you can’t claim statutory interest if there’s a different rate in your contract with a customer or client. If contractual interest is listed in your agreed payment terms (on the purchase order or in the contract) at 3% above the Bank of England base rate, for example, then this is the rate you can claim.
However, you can’t use a lower interest rate if you’re dealing with a public authority.
Example of statutory rate of interest calculation
If a company is late in paying, you can charge statutory interest plus the current Bank of England base rate. The base rate changes occasionally, so you’ll need to check out the correct rate on the Bank of England’s official site.
Here’s a quick example calculation of statutory rate of interest:
Let’s imagine your business is owed £1000 and the Bank of England base rate is 1%. The annual statutory interest would be £90 (£1000 x 0.09 = £90). Divide £90 by 365 to get the daily interest, i.e., 25p a day (90/365 = 0.25). After 50 days, this would be £12.50 (50 x 12.5).
How to make a statutory interest rate demand?
You can make a statutory demand to seek payment from a company without the need for a lawyer. When you’re claiming statutory interest, you’ll need to send a new invoice to the supplier which includes the new cost. Make sure you state on the invoice that you’re applying a late statutory interest rate payment charge and that you have a legal right to do so. You could also include a reference to previous correspondence that illustrates their non-payment of your original invoice.
In addition to statutory interest, you may also be able to claim debt recovery costs. However, these kinds of payments are limited in scope.
What is a statutory interest calculator?
Whether you’re entitled to claim statutory interest or contractual interest, you can use an interest calculator to tell you exactly how much you should be charging. It will calculate the statutory interest, plus any late payment compensation you can claim. There are quite a few statutory interest calculators available online to help you sort out the sums, including The Small Business Commissioner interest calculator.
As a last resort, you may have to consider legal proceedings. This scenario is far from ideal, but if the threat of having to pay statutory interest hasn’t stirred them into action, it may be your only option.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.