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Legislation and Contractual Clauses – Late Payment

Late Payment Legislation and Contractual Clauses

Why is late payment a problem? 

Over £30 billion in late payments is owed to SMEs and around 85% of small businesses have experienced late payment, according to figures produced in late 2013. Many firms are suffering and even going under as a result of debts which are simply not being paid. Tackling late payment is a key skill for anyone running a business. A diplomatic approach in this area is absolutely essential, as the cost of losing a client due to an over-zealous debt collection strategy can prove far more costly in terms of lost business compared to losing some interest on a late payment.

What’s the late payment legislation?

All businesses which suffer from late payment by clients are protected by legislation which imposes a default rate of interest (8% above the Bank of England base rate) after 30 days of invoicing or delivery of goods or services (whichever is later). There are also fixed fees which can be demanded in respect of debt recovery costs.

Can I set my own late payment contractual clauses?

Although it’s useful to be aware of the statutory position regarding late payment, in practice many business will want to set out their own terms. They are free to do so within certain boundaries which are designed to ensure fairness to both parties. It’s extremely important to agree on a set of clear terms and conditions at the start of a business relationship to avoid the situation of late payment cropping up in the first place. After all, prevention is always better than cure.

How else can I manage late payment?

Doing a bit of checking when you’re considering entering into a contract with a new client can provide some reassurance that you’re not dealing with a cowboy. But if you do not receive payment on time, don’t jump to conclusions. Talk to your client in case the delay is due to administrative problems or a simple oversight. You can also send them a gentle reminder letter which may be all that is needed to prompt them to pay up. Also make sure that you record the dates of any invoices sent and payments received to help manage the process of payment and establish any patterns which could lead to a decision to renegotiate a contract.

However, before taking any step seeking payment from a debtor, you will need to check whether the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 apply to prohibit that step. 

A variety of documents which may help with late payments can be downloaded from our Business Documents Folder. Click on the title of any relevant topic below for further information.

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