Two types of interest: contractual and statutory
Contractual interest: is found in the agreed payment terms, on the order or in the contract (eg 4% above Bank of England base rate). If there is no such agreement, contractual interest cannot be claimed.
Statutory interest: the law allows business creditors to charge interest for late payments.
If there’s a contractual interest rate, you can only claim statutory interest if the contract, or your Invoices and other commercial documentation, expressly reserves the position regarding statutory interest. Check your Terms and conditions.
Think about your relationship with the customer before adding interest or costs, and give them a chance to pay.
When does a payment become late?
If you haven’t already agreed when the money will be paid, the law says the payment is late after 30 days for public authorities and business transactions (unless longer payment terms have been agreed and, if the terms are longer than 60 days, provided that the agreement is not grossly unfair to your business). The days are counted from the date that either the customer gets the invoice, or you deliver the goods or provide the service (if this is later).
How to calculate interest
Statutory interest is 8% plus the Bank of England base rate for business to business transactions.
You can’t claim statutory interest if your customer is a consumer and not acting in the course of a business – in this case you can only claim interest if the contract sets a contractual rate.
For example, if the Bank of England base rate is 0.25%, statutory interest for a recent debt would be 8.25%; check the Bank of England base rate history.
The calculation for statutory/contractual interest is: (Debt x interest rate x the number of days late) /365.
Worked example (using statutory interest and assuming a base rate of 0.25%):
- your business is owed £1,000
- the annual statutory interest on this would be £85 (1,000 x 0.0825 = 82.5)
- divide £82.5 by 365 to get the daily interest: 22.6p a day (82.5 / 365 = 0.226)
- after 50 days this would be £11.30 (50 x 0.22.6 = 11.30)
If you are seeking to recover a debt on a business to business or consumer transaction, you can consider using a Late payment letter and if the debt still remains unpaid, consider following this up with a Second late payment letter. If you want to issue proceedings to recover a debt (which should be a last resort) consider using a Letter before action. Rocket Lawyer’s late payment letters will even calculate the interest due, if you chose to claim it. Before you issue proceedings, consider alternatives to legal action.
Claim debt recovery costs on late payments
You can also charge a business a fixed sum for the cost of recovering a late commercial payment on top of claiming interest from it; how much depends on the amount of debt and is set by law.