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Interest rates on unpaid invoices may be something you as a business owner have considered. It may be the incentive some debtors need in order to pay their debts before being charged more.
There are many reasons why you may consider applying interest rates on unpaid invoices; however, there are some things you may need to consider before making these changes.
For instance, consider the current financial market and look at what is happening with interest rates. From there you will need to look at other processes, keep reading to learn more about interest rates on unpaid invoices and what you need to be wary of.
What is happening with current interest rates?
In order to help combat the rising cost of living and inflation, the Bank of England has recently increased interest rates. The current bank rate is 5%, so how does this affect businesses?
When can a business apply interest rates on unpaid invoices?
A business can only apply interest on unpaid invoices once the invoice has become overdue. The standard time frame for an invoice to become overdue is typically 30 days.
However, the terms you state on your invoice may differ.
How can you apply interest on unpaid invoices
There are two main types of interest which you may wish to consider when looking at adding interest on unpaid invoices.
Statutory interest for unpaid invoices
Statutory interest refers to the interest charged on late payments. The Late Payment of Commercial Debts (Interest) Act 1998 is the main legislation for late payments, allowing creditors to add 8% simple interest above the Bank of England’s base rate to business-to-business debts. Creditors can also charge a fixed fee of between £40 and £100, which depends on the value of the invoice.
Remember to keep in mind that the Late Payment Act only applies to contracts between businesses, and not between businesses and consumers, contracts not for goods or services, or select international contracts.
Contractual interest rates on unpaid invoices
Businesses are allowed to negotiate an interest rate different from the Late Payments Act standard rate, but it’s essential to consider certain factors. Setting an interest rate too low may not provide ample compensation for the creditor and make it unenforceable while a rate set too high could be seen as a penalty clause and unenforceable. Essentially, the interest rate should align with the creditor’s commercial interest in getting their debt paid.
What additional legal actions can your business take?
If charging interest on unpaid invoices seems like too much trouble due to laws and regulations, there are additional actions that you and we could take.
1: Implement consistent payment reminders
2: Letters before action
3: Debt recovery assistance
4: Small claims courts
If you are struggling with collecting unpaid invoices here at My Debt Recovery, our team of experienced debt recovery agents work with you to help collect your debt whether that be letters before action, county court judgement, enforcement, and more we can help you receive the money that is owed.
Speak to us today for more information on how we can help.
**Disclaimer; the content of this blog was correct at the time of writing any news within the financial market is subject to change. Please do not use the information written in this blog as financial or legal advice.
