Why You Should Be Charging Late Fees
Managing a steady cash flow is never easy.
With so many business attributes in abundance – it’s essential to have some sort of leverage to ensure your business gets paid.
… and to deter would-be non-payers.
Here are 5 key reasons why the Late Payment of Commercial Debts and Interest Act 1998 (UK only) – ( The Act ) is crucial in getting your business debts paid.
… and when and how you should use it.
1) Working Capital
Many business owners think generating Sales is enough to promote the overturn in your Balance Sheet credentials.
However, introducing this into your business credit policy gives your business an extra shift in getting paid on time and enables you to generate extra income into your business.
2) A criteria for fixed fee late payments
Depending on the number of Invoices that you have outstanding, the Act enables you to manifest the following charges to each Invoice that is outstanding:
– up to £999.99- you have the right to charge £40.
– from £1,000 – £9,999.99 – the Act enables you to charge £70
– over £10,000 – the threshold for charging increases to £100.
So, just to clarify the point here – this enables you to charge a Late Payment Fee per Invoice and not just based on your overall debt.
3) The right to charge interest on all Invoices.
You have the right to charge interest on each and every late Invoice that is due.
This effectively determines the date on which your invoice became due, and then based on the number of days that your invoices have been outstanding, you would multiply this at a rate of 8.75% (at the time of writing.)
Fortunately, it’s not something I have plucked from thin air, but the Interest is charged at 8% over the Bank of England base rate, which is currently at 0.75%.
Now, this may not seem a lot, but remember when interest rates were at 5.75% in 2007, or when the Act was introduced around 1998, base rates were tracking at around 7.25%, the Interest rates are a substantial deterrent for any of your riskiest Customers.
4) The Right To Recover Reasonable Court Costs
The double-edged sword described in Points 2 and 3 should be enough to deter your late payers, but depending on your current business’s bad debt ledger, this alone may not be sufficient.
To add weight to financial injury to your debtors, the last benefit is an amendment to the Act from March 2013; provided that this is not included in your standard payment terms and conditions, the Act enables any business that is owed money to charge reasonable debt recovery and enforcement costs.
Please bear in mind that the Recovery Costs that one can charge would need to be reasonable to pinpoint the overall costs incurred in issuing legal action for the entire debt that is due from the Customer.
5) Credit/Invoice Policy Amendment
Last but not least, as this is enacted by Parliament, the discretion is yours to apply this to your credit policy.
It protects you and your cash flow if you are not paid on time. Whether you decide to quote this on your payment terms of business and/or on your Invoices and (SOA’s) Statement Of Accounts is not mandatory, but advisory – as making your Customers have a right to know as a further deterrent to their paying late.
It may be covered under your indemnity clause in your contract, but still, this argument could be raised later, which could be best avoided if you want to avoid spiralling costs.
However, as a general guideline, you should, in your initial contract, place a clause to be indemnified of all costs, including Debt Recovery and Court Costs.
It is no longer mandatory, so it cannot be argued in Court as an express term of your Contract, as opposed to that of an implied term that is standard and that as a business owner, you are now able to rely on this act, if you do wish to pursue legal action against your end user/debtor.
Adding this strengthens your Balance Sheet
Policy additions increase your cashflow
FAQ
Calculating Late Payment Fees and Interest
a) Do we calculate using working days or every day?
Calculations include weekends and bank holidays too.
E.g. standard Invoices are usually payable after 30 days if a standard process is unavailable.
b) Do I risk losing my Customers?
Not at all. But if your Cash Position is venturing into desperation, it may be beneficial to start charging all Customers the process introduced under the Act, depending on the value of your Invoices are outstanding over two months and/or more depending on your business or internal credit policy.
As explained above, it is purely advisory rather than mandatory, and you would not risk losing key Customers.
c) Where do I get a better understanding of this?
If you have an Accountant or Business Coach and/or Mentor, speaking to them is worthwhile. Similarly, your Industry governing body may or may not be able to advise you further.
They will be able to advise you better if this is something that you can or cannot apply to your outstanding Invoices.
d) What if I want to do my own research
Have a look at the following links to gain a better understanding:
http://www.govopps.co.uk/damaging-late-payment-culture-for-smes-to-end-on-16-march/
https://www.gov.uk/late-commercial-payments-interest-debt-recovery/charging-interest-commercial-debt