Late payment is a serious issue for businesses. It is a real risk to UK businesses, small ones in particular, as it can cause cash flow problems and threaten commercial survival. The result of this payment being continually late is that a business may have to raise its prices to compensate, the effect of which is to make it less competitive.
In order to counter the negative effects on UK businesses, the government has introduced legislation giving a statutory right to claim interest in the event of another company paying its bills late.
The Late Payment of Commercial Debts (Interest) Act 1998
This legislation is called The Late Payment of Commercial Debts (Interest) Act 1998. Prior to the introduction of this Act, businesses were only able to claim interest on late payments if they decided to pursue it through the courts. This Act allows small businesses to claim interest on these payments by large businesses, public sector bodies and other small businesses.
For the purposes of the Act, a small business is defined as having 50 or fewer employees. The legislation is not the only way for a business to remedy this on going problem. It is considered to be perfectly acceptable for a supplier and purchaser to make private arrangements to resolve a dispute of this kind. This is known as 'contractual interest'.
- If a supplier and purchaser chose to make their own arrangement, or agree 'contractual interest' as described above, the Late Payment Act will not apply.
- However, in all other cases the provision for late payment provided by The Act will apply.
- The government has also made provision to prevent purchasers from abusing their right to agree 'contractual interest' with a supplier.
The law states that the agreed remedy for these payments must be enough to compensate the supplier for the cost of late payment or to deter the payment. 'Contractual interest' agreements must also be considered to be fair and reasonable. For example, if the purchasers are deemed to be attempting to avoid payment penalties by negotiating unreasonably long credit periods deliberately with this end in mind.
Services such as checkSURE have a very important part to play in ensuring that late payments do not become a problem for your company. In order for your business to succeed and grow in a competitive marketplace, it is necessary to take a small amount of risk by extending credit to your customers.
It is possible to insure against these risks and other problems by insuring against possible default and insolvency on the part of your customers. Insurance is an important tool in credit management and can minimise the risk of bad debt and late payment.
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