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The
legislation
As a small business you will no
doubt have a number of customers who are persistent late
payers, or you reluctantly except business knowing that
payment will probably be in excess of 30 days. If the late
payment is a continual problem, this can ultimately effect
your livelihood, for the sole trader this can be the
difference between sinking and swimming. To alleviate many
of these problems the government recently introduced new
legislation known as "The
late payment of commercial debts (interest) act 1998".
Although the legislation was brought in, in 1998 it only
affected companies who were employing more than 50 people
(large businesses), or the public sector which would not
affect the vast majority of small businesses whose debts
arose as a result of trading with other small businesses.
The small business
However, from November 2000 small businesses can claim
interest on overdue payments from other small businesses. If
you intend to use the power of this legislation on any of
your late payers it may be worth warning existing customers
(especially those offending and persistent late payers) of
this new phase in legislation and your intentions to use its
powers.
It is also important to
remember that if you are a small business and tend to hold
back payment for whatever reason, this legislation applies
to you and you may incur interest charges! So be warned.
Late payment
Most small businesses cannot afford to offer credit
facilities to any of the existing or potential customers.
However most businesses automatically assume of 30 day
payments period regardless of the company they are dealing
with. Therefore if you intend to use the powers of this
legislation against forthcoming late payment you may need to
think about what you consider late payment to be, and ensure
your customers are clearly all were of your terms of
business. The late payment of commercial debts act sets a
default period of 30 days for payment, and therefore you may
consider using this default period as a standard for your
own payment terms. It is important that you ensure that your
customers are clearly aware that if payment is not received
after this 30 day period interest will be incur thereafter.
You may consider doing this in writing before you commit to
business.
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The rate of interest
The rate of interest is calculated by using the (base
rate*) for the end of the day your payment terms ended plus 8%.
The interest owed on your late payment is known as simple interest and it
is calculated by:
*Bank
of England Monetary and Finance Stats
debt x interest rate x (the number of late
days divided by 365)
Example
If the base rate was 7% then the rate of interest you would charge would
be 7% + 8% (15% altogether)
Joe Bloggs Inc. owes £400.00 and is 30
days over due. To calculate the daily rate of Interest:
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400.00 x 15% =
£60.00
£60.00 divided
by 365 = .16
Daily
Rate of Interest =
16p
Now multiply
this with the number of days the invoice is over due
.16 x 30 = £4.93
For a 30 day
overdue payment on £400.00 invoice Joe Bloggs Inc currently owes
404.93.
This figure will
increase as over due date increases |
Steps to take when payment is late
Every step you make to keep your customer
informed of the situation is advised. Ensure therefore that your
customer is made aware of:
- The amount over due
- The daily rate of interest which will
accrue as a result of late payment
- A copy invoice or items/services
payment is owed on
- The address a cheque should be sent to
- Whom it should be made payable to
- The method of payment you will accept
(visa, cheque, online payments)
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