Why everyone should have interest on their radar

5 November, 2018

 

Calculator and paper with interest ratesMost commercial contracts provide for the consequences of late payment and will have a contractual interest provision, but not all businesses realise that if business to business contracts for the sale of goods and services are silent about interest, there is a statutory right under the Late Payment of Commercial Debts (Interest) Act to claim interest at 8% above base rate plus certain costs.  

 

Interest (particularly compound interest) can really add up when working with larger debts, higher interest rates or long overdue debts so it is worth both the paying party and the receiving party having interest on their radar. 

 

If you’re a supplier, drawing a customer’s attention at the outset to your right to claim interest, referring to this on invoices and informing them as soon as interest starts to accrue can help encourage prompt payment even if payment of interest is not actually insisted upon.  Whether or not to insist on payment is likely to depend on how this might affect the relationship with your customers.  In some circumstances the money involved may only be a few pounds and not be worth making an issue of but where there is repeat business, pursing interest can help set a useful precedent so that customers don’t get into the habit of routinely paying late which might cause you cash flow issues.

 

If you’re the paying party under a contract, its worth noting that a supplier has up to six years to bring a claim for interest.  We’ve seen liquidators and receivers pursue ex customers of the business for interest on late payments going back up to six years even if payment was received but it was made late, which can come as a bit of a surprise.  The only way for parties who are obliged to make payments under a contract to be sure of avoiding claims for interest is to pay sums before they become overdue. 

 

If there is a dispute, it is also in the interest of the paying party to try and resolve it sooner rather than later otherwise interest could be accruing which may turn out to be a significant sum, although interest is usually a negotiating point.

 

For more information on interest please see our Guidance note on interest in commercial contracts.