Late payment of commercial debt is a big problem for many businesses. Not only is it frustrating to have to chase what you are owed, but unpaid debt can also cause serious cash flow issues, especially for smaller companies.
Charging interest on late payments is an important tool to both encourage prompt payment and reimburse businesses for the inconvenience caused when they have to wait longer than expected to receive their money. However, it is also vital to ensure your interest rates keep you on the right side of the law. Failure to do this may open you up to legal liability, which can have far more serious financial consequences.
The first port of call when considering the amount of interest you should charge is any contract you entered into with the debtor. Many business contracts will specify the rate of interest you can charge in the event of late payment. If you do not have a written agreement, it is still worth checking if you negotiated an interest rate by email or through other means.
If you do not have a contractually agreed interest rate, you can charge interest on late payments at the statutory interest rate. This is 8% above the Bank of England base interest rate. For example, if the base rate were 1%, the total interest chargeable would be 9%.
My contract rate is higher or lower than the statutory interest rate, is this legal?
Yes. The statutory interest rate is not a legal requirement. It acts as a default which only applies if your contract does not specify a specific rate. This means that contracts which specify higher or lower rates are entirely legal.
Can my business charge the statutory rate of interest instead of the contract rate?
No. The statutory interest rate acts as a default if no contract rate has been specified, but it cannot replace an existing interest rate under a contract. For example, if a contract has an interest rate of 5% and payments are made late, interest can still only be charged at 5% even though the statutory rate is higher.
Contact our Debt Recovery Solicitors today
At Three Graces Legal, we understand how frustrating it can be to chase late payments and appreciate the negative impact this can have on the financial wellbeing of your business. Get in touch today to find out how we can help you safeguard your company’s finances and recoup the economic damage caused by late payments. Call us today for free initial advice on 0151 659 1070 or complete our online contact form.