The Know-it Blog

The Know-it Blog

The Know-it team

Dec 29, 2020

How To Boost Cashflow With Late Payment Interest

How To Boost Cashflow With Late Payment Interest

Did you know you’re legally entitled to claim late payment interest and compensation for any of your overdue invoices?

Late payments are one of the most frustrating parts of doing business and the effects are devastating, with 440,000 businesses possibly being forced to close as a direct result of being paid late. This shows the importance of good credit control when it comes to cashflow!

Thankfully, there’s support that we can lean on where we have statutory right to claim late payment interest, compensation and even costs for debt recovery on invoices that are paid late thanks to the late payment of commercial debts act.

The Late Payment of Commercial Debts Act explained

Late payments to businesses have been an issue for a very long time, although they are worse than ever right now!

The first iteration of the late payment of commercial debts act was introduced in 1998 and it gave businesses a legal right to add interest to late commercial invoices.

The legislation was beefed up in 2002 allowing businesses to also claim debt recovery costs from their debtor, giving even more incentive to pay on time!

Latest changes to the late payment of commercial debts act states that if no payment date has been agreed then a payment is legally deemed as late 30 days after:

The customer receives the invoice or the goods or service is provided, if this is later than when the invoice is received by the customer.

Calculating late commercial interest

In June this year the Bank of England hiked interest rates again to 5%, the highest rise in 27 years!

The statutory interest you can legally add to overdue invoices is 8% plus the Bank of England base rate, now sitting at 5%, totalling 13%.

If you have a different interest rate agreed in your contract, then this is the interest rate you would be required to charge.

Here’s an example of how we would calculate late commercial interest on a £200,000 invoice overdue by 90 days.

The statutory interest you could charge would be £26,000 (13% of £200,000)

We would then get the daily interest by dividing £26,000 by 365 which would be £71.2328767123.

We would then multiply £71.2328767123 by 90 days to give us £6,410.96

Therefore, the statutory interest that we could add to a £200,000 invoice overdue by 90 days would be £6,410.96.

Charging late payment interest on your overdue invoices

If you haven’t done so already, you should send a new invoice to your customer that includes all the items on your initial invoice(s) but this time with the late payment interest you’ve calculated added on.

Bear in mind that the interest you calculate does not include VAT, however it is charged on the gross amount which does include VAT.

Claiming late payment compensation and reasonable costs

As we touched on previously the late payment of commercial debts act also means businesses can claim compensation on overdue invoices.

The great thing is this can be charged on each individual invoice!

For invoices under £1,000.00 you can add £40.00 compensation.

For invoices under £10,0000.00 you can add £70.00 compensation. For invoices over £10,000.00 you can add £100.00 compensation.

Claiming reasonable costs for debt recovery

Adding late payment interest and compensation can often be a great incentive to encourage payment.

Unfortunately, we sometimes come across problematic customers who aren’t forthcoming with payment, even when threatened with additional late payment interest and compensation.

In these situations, you may need to call in some reinforcements to recover what you’re owed, such as a commercial debt recovery specialist.

The late payment of commercial debts act now means additional costs for debt recovery can be claimed if these costs aren’t met by the compensation you can claim.

Taking action on late payments

Are overdue invoices keeping you up at night?

Collect-it takes the worry away from recovering unpaid invoices by providing a risk-free solution!

We partner with UK leading commercial debt recovery specialists Darcey Quigley & Co who have a proven track record of collecting millions of pounds worth of commercial debts from around the world. They operate on a no-win-no-fee basis and you’ll receive a free no-obligation quote directly in the Know-it platform.

Try Know-it free for 30-days and receive free quotes for debt recovery and automatically chase your overdue invoices!

You don’t even need to enter your credit card details, so what have you got to lose?!

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Lynne is the Founder and CEO of Know-it!

She is a passionate, driven and forward-thinking entrepreneur determined to help resolve the late payment crisis gripping SMEs.

Having worked within the credit management industry for over 27 years and ran UK leading commercial debt recovery specialists Darcey Quigley & Co for over 16 years, Know-it was devleoped to make credit control more accessilble for SMEs to help them effectively mitigate credit risk, reduce debtor days and boost cashflow!

Connect with me on LinkedIn!

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