When your company isn’t paid on time

James Salmon, Operations Director.

When your company isn’t paid on time and you fail to take action on late payments, the effect on on your cash flow can be traumatic.

You can risk your home, your livelihood,  and the livelihoods of your employees. With Brexit causing consumers and businesses to put on hold any uncritical expenditure and investment, it essential that you maximise your cash flow by being quick to act on late payment.

Knowing your rights, and acting decisively, can make all the difference!

As soon as your company’s invoice to another company becomes late, you are legally entitled to interest and compensation. And the clock starts ticking as soon as the due date passes.

Say your invoices are due in 30 days. On day 31, if the payment has not arrived, you can start charging interest and also claim late payment compensation.

People worry about maintaining goodwill, but businesses forget that goodwill is a two-way street!

Your customer is trouncing the good will by paying late.

The due date is the date the payment should have arrived. It is not the date to start thinking about it!

Too many businesses have a policy of not taking payment seriously until they have received a final demand.

Yes from day 31, due date plus one you can charge interest and also compensation.

Interest

Interest is easy to calculate. You simply charge interest at 8% on top of the Bank of England base rate (so currently 8.75%). The formula is (Invoice value) times (Interest rate – 8.75%) times (No of days the invoice is late) divided by 365.

The annual rate of interest is the (Invoice value) times the (Interest rate – 8.75%)

Dividing it by  by 365 gives you the daily rate of interest. This amount can be added for every day the invoice is late.

Multiplying it by the number of days the invoice is late gives you the total interest due.

The formula is therefore (Invoice value) times (Interest rate – 8.75%) times (No of days the invoice is late) divided by 365.

You can claim this even after the invoice has been paid, if it was paid late.

Late Payment Compensation

As well as the interest you are entitled to compensation for the late payment. You should add a non-vat charge of £40, £70, or £100 depending on the value of the invoice.

If the invoice is over £10,000 you are entitled to £100 compensation for the late payment, if its over £1000 you are entitled to £70, other wise you are entitled to £40.

Even if your invoice is only for a few pounds, you are still entitled to the £40 compensation. After all you still put to the trouble of chasing payment and your time isn’t less expensive just because the invoice is smaller.

This additional fee  is due to you under legislation. It is there to cover the  “reasonable costs” that your business incurred trying to collect what it’s owed.

Again you can claim this even after the invoice has been paid, if it was paid late.

Example

Say you have an invoice for £1000 that was due on the 30th April.

It is now the 30th May. What are you due?

You are entitled to the £1000

You are also entitled to £70 in late payment compensation

And interest?

The annual rate of interest is £1000 x 8.75% or £87.50

The daily rate is therefore £87.50 divided by 365 or 24p.

The invoice is 30 days late so you are entitled to 24p x 30 or £7.20

So you are entitled to £1000 plus £70 plus £7.20 or £1,077.20.

And if they pay the £1000, you can still ask for the £77.20.

Goodwill?

Of course, charging interest and compensation isn’t going to boost your relationship with your client.

But why not make clear to your customers at the very start that you will be enforcing this policy.

You have no obligation to notify them in advance that you will be enforcing your legal rights, but doing so will help maintain the goodwill.

You can simply put on your invoices that you will be enforcing your rights to late payment compensation and interest for late payments. There is no need to set out the specific rates, in fact setting your own late payment charges or interest rates could invalidate your claims to higher compensation and interest under the Act.

You could also send your customers a nudge before the due date, reminding them that late payment will bring additional charges.

If you can get your payment sorted amicably and on time then its a win-win.

You may even choose to give your customer a few days wiggle room with a reminder after the due date, even though by now you’re already a victim of late payment.

The Law is on Your Side

First and foremost, know your rights. Late payment legislation was introduced in 1998, allowing you to charge the interest and compensation. It was supplemented in 2002 and toughened up in March 2013, in the shape of the ‘The Late Payment of Commercial Debts Regulations 2013.’

Since March 16th 2013, under this latest legislation applies you are also allowed to add on and recover any extra third party collection costs that you may incur.

Don’t be afraid to charge these and politely chase payment.If you are polite and firm and clearly sign post you can proceed without risking your good relations and the commercial relationship.

After all, if they are a good customer, they should be mortified that they made a mistake and paid you late.

You still need good credit management

Ultimately though,  adding late payment charges is no use if your client doesn’t have the means to pay.

It’s up to each company to ensure that their customers finances are sound and they have the ability to pay for the goods or services they order.

If they can’t pay then whether its £1000 or £1077.20 that doesn’t get paid and ends up written off, its the same result.

And remember that write off isn’t just the loss of that sale. How many more sales will you have to do to cover the costs you incurred in that supply?

If your margin is 10% then you will have to do £10,000 worth of business to make up for that loss.

Many companies come unstuck when their customer — who initially looked pretty wholesome and perhaps has traded well for many years-  suddenly runs into financial difficulties down the line.

So have systems in place to run a ‘Credit Check’ on them.  Also have them monitored so you are advised of any changes.

Note though, newly incorporated companies will lack a credit record, and will therefore be rated ‘zero’. Of course, without them having a trading history, you’re going to find it difficult to ascertain whether your customer is going to be reliable. So perhaps keep them on a short leash or ask for deposits or credit card payments.

Bear in mind,  credit-checking a customer can’t protect you from the unexpected. However it’s a good way to identify poor quality customers at the start and it can help you take steps to limit your financial exposure, with shorter payment terms or weekly billing, instead of monthly invoicing.

Warning Signs

It’s impossible to predict ‘dodgy debtors’ with any consistency, but there are some warning signs that get our spidey-senses tingling every time.

You should be particularly wary of:

  1. Companies that are newly incorporated or those that are owned or directed by individuals with a history of lots of short-lived, limited entities in a similar field.
  2. Companies that pay quickly at first, but then slow down on payments over time
  3. Payments that repeatedly fail to come through towards the end of your contract.
  4. Sudden or repeated changes in personnel or directors (even those staff not directly responsible for payments)
  5. Confusion within the business caused by people leaving without a handover or notice period
  6. Failure to meet prearranged payment terms, like staggered payments
  7. Regular excuse giving for late payments
  8. Payments always having to be prompted and never on time.

Plan of Action

Armed with the above information, it’s wise to have a credit plan or strategy so that you and your staff have a clear idea of when and how to chase what you’re owed.

  1. Credit check and monitor your customers
  2. Clearly communicate your credit terms and  let them know from the beggining that you will apply late payment legislation.
  3. Remind your customer when the payment is due
  4. Chase as soon as your invoice goes overdue.
  5. Apply for late payment compensation and interest.
  6. if they don’t respond favorably or just ignore you, escalate the matter by using a reputable third party collection company.

Remember your suppliers too

Remember if you are going to be firm on late payments then you should really practice what you preach.

Make sure that your suppliers receive their payments on time.

This  means actually arranging payment a few working days before hand so that it actually arrives on time.

And if holidays or other delays can be anticipated, put in procedures to make sure they don’t cause late payments.

Get the cheques out in the post early. Or arrange bank transfers in advance. Communicate with your suppliers to maintain a good relationship.

And this isn’t being magnanimous.

This is protecting your company from being charged late payment compensation and interest by your suppliers.

And remember they can apply that compensation retrospectively up to six years after the late payment.

You may think that your goodwill will stop them claiming it now, but what happens when the relationship ends?

Pay on time now and avoid having that painful late payment compensation claim hanging over you.

About CPA

The Credit Protection Association can help!

Formed in 1914, CPA has been providing credit management services to SMEs for over 100 years.

At the Credit Protection Association, we provide first class commercial credit information that can help you avoid being over extended to commercial customers who are at risk. Our monitoring service can flag up warning signs long before the end, giving you the chance to adjust and reduce your exposure. We provide recommended credit limits and credit scores on a traffic light system and can help you set appropriate credit policies for your business customers.

We regularly publish lists of the latest company insolvencies but by then it is too late. Our credit reports however predict approximately 96% of company insolvencies long before they arrive.

Companies in trouble usually have very bad bad cash flow and they try to deal with it by delaying payment to their suppliers, increasing your exposure to them.

If your customers are bad payers, help us help you identify the risks.

Why use a third party collector?

As a third party collector, we can also get your payments prioritised over those who are not as hot on collections. When you customer receives a letter from the Credit Protection Association regarding their outstanding account, they are going to want to get that resolved as a priority. Our overdue account recovery service can get your unpaid invoices to the top of their “to do” list and get your invoice paid.

Over the years we have collected billions in overdue invoices for our customers. Whether your late invoices are owed by businesses or consumers, we can help get you paid.

Our debt recovery and credit management services give our members the financial freedom needed to grow and prosper, while our new Late Payment Compensation department could unlock hidden potential and offer the compensation needed to springboard your business to success.

Late Payment Compensation Windfall

If you trade with other businesses and were often paid late then you could be entitled to significant compensation.

Over the years you have had all sorts of additional costs and cash flow situations caused by late payments and you are entitled to be compensated by your business customers for that.

That compensation could be the cash windfall your business needed.

How can CPA help?

CPA has developed a unique technology to dig into your accounting records and discover the cash injection you are due by means of compensation. The software does all the hard work. Our software interacts over the cloud with over 300 different software packages, working directly with your accounts package, just so long as it’s stored on a computer.

We do the work, you receive the cash.

If you have supplied goods and services to businesses on credit and were regularly paid late then you could be due significant sums in late payment compensation.

We are talking to companies and unearthing claims in the hundreds of thousands from former business customers who paid them late. Large business customers who abused their power to inflict unfair and sometimes illegal payment practices.

We are helping companies that were looking to close down, who looked insolvent and finding that cash injection they need to avoid insolvency.

CPA is passionate about late payment

The Credit Protection Association has been protecting smaller firms against poor payment practices for over 100 years.

We are passionate about breaking the late payment culture that holds back the UK economy and threatens many SMEs with cash flow difficulties being the single biggest killer of Britain’s small businesses.

If you were regularly paid late we can help. Those former customers used you to boost their own cashflow, regularly paying you late.

As a result you had extra costs, you had the distraction of having to chase payment, you had opportunity costs because your capital was tied up in their late invoices.

Under little used legislation, you are entitled to compensation for those late payments.

Now you can boost your own cash-flow.

CPA can help unearth the those hidden treasures.

We have the technology to reveal the compensation you are due and we have the extensive experience and expertise to then turn those claims into cash.

Yes, CPA can help you boost your business cashflow.

Don’t et your bankers control you, contact CPA today.

Read our blog here on how to crack down on the late payment culture.

Read our blog here on how to give late payers the slap they need.

visit our late payment compensation page

See our full blog and FAQ on late payment compensation

Ready to speak to an advisor?

For help or advice on credit management, entirely without obligation.

Call us today

0330 053 9263

The Credit Protection Association is a credit management company established in 1914. If you supply goods or services on credit then we can help you!

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