We seem to live in an age of late payment. Perhaps it shouldn’t be this way, but it seems to be the norm, and after all, what can be done to encourage prompt payment from that valuable client whose business you want to retain?
If I have to sue for the debt and my contract or invoice has not specified any other rate, as long as it is a business to business contract for goods or services, then I can claim simple interest at 8% above base rate. So 8.5% plus a small fixed sum of between £40-£100 for most commercial suppliers (Late Payment of Commercial Debts (Interests) Act 1998).
If I get a judgement, then interest runs at 8% until payment.
If I am a customer wanting to avoid paying a high interest rate, then my agreement needs to specify a “substantial remedy” for my supplier if I make a late payment, which is probably something around 4% or 5% above base rate. If the agreement is silent or specifies too low a rate, then the default rate of 8% over base rate will apply.
If I am a supplier wanting to charge a higher interest rate for late payment, then I must take care; too high and it might be treated as a penalty and be unenforceable. What is considered too high varies on the type of agreement, but if the amount goes far beyond a compensatory level and is clearly just an economic punishment, then it is at risk (15% is starting to get into risky territory).
Compound interest is at risk of falling into this category if it results in too high a payment.
And, have I thought about a clause which offers my customer a discount for early payment – in effect, a “reverse penalty”?
At the end of the day, the desire is usually not to fall out with and sue the customer, nor to charge interest, but rather to create a climate which promotes voluntary prompt payment and so secures a healthy business relationship. It is part of the power game that exists in every trading relationship.