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You can agree any credit period you want with customers but you should agree the payment period before the transaction takes place. Don't assume your usual terms apply as the payment period should be part of your negotiation on pricing and is the period agreed between parties. This agreement can be verbal but it should preferably be in writing.

Industry standards for payment tend to be net monthly - that is, payment at the end of the first full month following receipt of the invoice. These terms are standard as they allow a business to actively plan payments. However, you should negotiate your own terms and price your services accordingly.

Where there is neither an agreement in place nor custom and practice in operation, the law sets a default period of 30 days.

This period starts from whichever of the following is later:

• the date on which the goods are delivered or the service is performed
• the date on which the customer receives notice of the amount of the debt

Purchasers cannot contract out of late payment legislation ie they cannot deny the supplier their right to, for example, charge statutory interest once a payment is overdue.

Fair Payment Code

The Fair Payment Code (FPC) is a tiered system of Awards aimed at driving best practice and improving payment performance. It replaces the Prompt Payment Code.

The three Awards are:  

• Gold Award – for businesses paying at least 95% of all invoices within 30 days
• Silver Award – for those paying at least 95% of all invoices within 60 days, including at least 95% of invoices to small businesses within 30 days  
• Bronze Award – for businesses paying at least 95% of all invoices within 60 days  

Every business granted an Award agrees to abide by the Code’s principles of being Clear, Fair and Collaborative with their suppliers.  

Find out more about how to sign up to the .

To reduce the chances of late or non-payment, you could:

• Make credit terms and conditions clear.
• State an intention to impose your rights under the late payment legislation in all contracts and invoices, eg "We will exercise our statutory right to claim interest and compensation for debt recovery costs under the late payment legislation if we are not paid according to agreed credit terms."
• Don't supply any goods or services until you are satisfied with the credit checks.
• Quickly issue invoices that are clear and accurate. Include only useful information eg order number, payment terms, due date, delivery date and method, unit cost and total payable etc. Email invoices or use first class post. You should reference the late payment legislation and the additional costs of paying beyond the agreed date.
• Use a computerised credit management system, which will help you keep track of customers' accounts and generate reminders when payments are late.
• Have a collection strategy eg telephone ahead of due dates to check that payment is in progress, or send reminder letters. Send emails/faxes if your telephone calls are being diverted or letters being ignored. If necessary, organise visits from sales staff and/or direct payment requests to more senior staff than normal.
• Set monthly targets - put together a payment timetable and ensure that you have staff who can devote their time to collection.
• Use an electronic payment tool.
• Ensure your staff are properly trained in credit management and debt recovery.

You could also take out:

• credit insurance - to cover you if you have a bad debt due to a customer going into insolvency
• legal expenses insurance - this covers the costs of recovering debts through the courts

To improve cashflow, you could also use a debt factoring service. This is where you effectively 'sell' your invoices to another company - see factoring and invoice discounting.

You have a statutory right to claim interest on late payments, as well as a contractual right to claim interest if you have specified this in your terms and conditions.

Should I charge interest on a late payment?

You can charge interest on all late payments. However, even if you indicate in your terms and conditions that you will charge interest on all late payments, it is up to you whether you actually do so or not.

You should address each debt on a case-by-case basis and:

• consider the relationship with the customer
• get the opinion of customer-facing staff
• assess your credit management system

What rate of interest should I use?

Rates for calculating interest are called reference rates and are fixed for six-month periods. The Bank of England base rate on 31 December is used as the reference rate for debts becoming overdue between 1 January and 30 June of the following year. The rate in force on 30 June is used from 1 July to 31 December.

You can calculate the interest payable on overdue bills by taking the relevant reference rate and adding 8%.

Alternatively, you can set a contractual rate that may be higher or lower than the statutory rate. If you set a contractual rate, the statutory rate no longer applies.

Interest should be charged on the outstanding gross amount inclusive of VAT. No VAT is chargeable on the interest itself.

See how to .

Charging interest

If you don't already charge interest, you may need to:

• adapt your credit management and billing systems
• amend invoices and terms and conditions so that they state you reserve the right to charge interest
• notify customers of your plans and check that they understand the new terms and conditions
• contact habitual late payers to discuss how they'll be affected

Make sure invoices include an agreed payment date so customers know when interest will start being charged - let customers know if interest starts to accumulate. 

Before charging interest, you could issue a letter stating that the payment is late and if it is not paid within, say, seven days, interest will be charged.

As well as charging interest under late payment legislation you can also claim costs for the recovery of late payments. There is an automatic and fixed compensation charge shown below, but you can also charge any reasonable additional costs of recovery where they exceed the basic compensation rate.

However, before applying the charge, you should:

• consider your relationship with the customer
• get the opinion of customer-facing staff
• assess your credit management system
• find out the general industry practice

If you decide to apply the charge, you should notify the customer in writing. You should also send them a new invoice with the charge itemised as an additional amount and the outstanding total debt adjusted accordingly.

Purchasers cannot contract out of late payment legislation ie they cannot deny the supplier their right to, for example, charge statutory interest.

Court action should be seen as a last resort. Before you take court action, you should consider the alternative methods of recovering debt outlined below.

While you consider the options, you should continue trying to recover the debt using the usual methods eg telephoning the debtor to remind them that the payment is now overdue.

Involvement of one of the following may also assist:

• An accountant - some offer debt collection services as well as advice on credit control and debt collection procedures.
• A solicitor - some solicitors specialise in debt collection. They can issue powerful letters in a short space of time. Agree a fee for this service in advance.

You could also use a debt collection agency - see advantages and disadvantages of using a debt collection agency.

A further alternative is for you, your debt collection agency or solicitor to issue a statutory demand, promising an application to court for the formal winding up of the customer's business if payment is not made within 21 days.

Finally, you could consider:

• negotiation
• mediation
• conciliation
• arbitration

For more information see recover debt through court.

Before taking court action to collect debts, you could consider instructing a debt collection agency.

Advantages of using a debt collection agency

• Debt collection agencies have the time, expertise and resources required.
• Some agencies now offer a no collection no fee service.
• Debt collection can be a fast method of recovering debts so could save you time.
• If the debt collection agency is polite and professional, you may keep your customer - this is unlikely to be the case if you take legal action.
• The agency can instruct solicitors on your behalf if your customer still refuses to pay.

Disadvantages of using a debt collection agency

• Using a debt collection agency can be costly - the commission on the money recovered is typically between 5% to 25% for commercial debts.
• You may lose your customer if the agency has poor communication skills.
• If the agency takes a heavy-handed approach, your reputation may be damaged.
• Your business may not be a priority - you may be one of many businesses the agency works on behalf of.
• The agency may not use legally trained employees.

You should also .

Taking legal action to recover your money should be a last resort. Therefore, consider all other alternatives before going to court.

If court action still seems the best solution, consider whether making a claim is cost-effective. It might be cheaper to write off small sums. If a customer is likely to place large orders in future, it may be better to let things lie if only a relatively minor amount is in dispute.

If you decide to take court action, make sure you have resolved any disputes over the goods or services you have provided. If you don't do this, the debt will be difficult to recover. You also need to make sure that customers have the means to settle. If they are bankrupt or in liquidation, your debt is probably irrecoverable.

Debts of up to £3,000

Debts of up to £3,000 are dealt with by the small claims track at your local county court. This offers a quick and inexpensive way of making claims for unpaid debts, as you don't have to employ a solicitor. with the Northern Ireland Court Service.

Debts over £3,000

Claims from £3,000 to £30,000 must be issued in a county court, while claims of more than £30,000 can be issued in the High Court. It's advisable to get legal advice about this - see choose a solicitor for your business.