Blackpool firm suggests interest solution to late pay

Michael Muschamp and Isabel Bamber of Rushtons
Michael Muschamp and Isabel Bamber of Rushtons
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Small and medium sized enterprises across Lancashire struggling to deal with late payments should look at interest as a possible solution, says a county accountant.

Michael Muschamp, of Rushtons Chartered Accountants of Preston and Blackpool, said for SMEs in all industries, late payments for goods and services can be a serious issue.

He said cashflow was harder to manage for smaller suppliers, and SME owners can often feelhelpless when dealing with larger customers. He said: “A question from many SMEs we’ve spoken to is ‘What tools can I leverage to ensure speedy recovery of payments?’

“One method by which SMEs can push for payment of invoices is by claiming interest on late payments.

“The statutory right to interest and compensation applies to all contracts and, as the interest on payments accumulates, it provides a powerful deterrent to late payment.

“The law gives the supplier the right to charge interest at eight per cent above the Bank of England’s base rate – however, although the Bank of England has recently changed that rate to 0.25 per cent, SMEs can continue to charge at eight per cent over the old rate of 0.5 per cent until 31 December 2016.”

He said this was because the rates were fixed for six-month periods.

He said: “In many cases, the rate of interest dictated by Bank of England base rate plus eight per cent will be more expensive for a late-paying customer (who is effectively borrowing from you) than overdraft money from the bank.

“This incentivises timely payment.

“You may think that claiming interest on late payments may seem to be adverse to good customer relationships, but by having a clear system in place, suppliers can actually avoid awkward situations.

He said communication with late payers was key, and can be distilled into three steps:

1. State agreed payment dates on all invoices and your intention to exercise the right to charge interest.

2. If the invoice is not paid by the agreed date, inform customers of the interest that they are now accruing.

3. Once payment has been received, issue a bill informing them of how the interest was calculated.