Interest or Penalties on Outstanding Accounts
Late Payers Should Pay Interest
Creditors Should Collect Their Interest
On 1st November 1998 small business suppliers gained the right to charge interest on accounts paid late. For more than one hundred years if a contract neglected to stipulate what was to happen when accounts were not paid timeously, that was an end to the matter and the unfortunate seller had to go without interest. From as long ago as 1978 it was recognised that larger concerns were using their weight, abusing their weight, and mercilessly delaying payment. The problem came into sharp focus in the recession in the early 1990’s, but it took until 1998 to try to provide the remedy.
The Late Payment of Commercial Debts (Interest) Act 1998 at last supplied the bits missing from a contract involving credit and was thought to provide the answer. It gave the commercial supplier of goods or services a Statutory right to interest, whether or not he put it in the contract. More, the right cannot be contracted out of – nor the rate whittled down by the debtor.
The Act came into force in three stages and has been available for since 1.11.98. It allows a supplier supplying another both in the course of a business, which expression includes professions, to charge interest on overdue accounts at, a swingeing 8% above base rate (the rate it was generally estimated small businesses paid for credit) from the “relevant date.” Nor was there anything complicated or technical in the meaning of “the relevant date.” It just meant the due date under the contract.
Despite the clarity with which the Act is worded and its clear invitation, DTI reports to date indicate that, however well-intentioned , the Act so far has been a waste of time. Sellers seem not to be willing to exercise their rights. Data published in May shows no improvement in the time taken by publicly listed companies to pay their bills. The average time it takes a plc to pay its bills is 46 days, the same now as in 1999, whilst 19% of the 3141 companies in the survey took between 60 and 200 days!
This is a pity. In a recent article on Controlling Sales Balances I posited that the reason for this failure to collect interest is that sellers think that pursuing their rights will prejudice the chance of repeat orders. It may. But I doubt they have even considered telephoning the buyer to see if he knows payments are late. Often the accounts dept has quite a different agenda and the buyer just does not know the accountant has re-arranging his bargain for him. In that size of organization it is unlikely that the buyer will get to know that their supplier is pursuing his legal right re interest.
Judging by the use so far by small businesses of a relief designed especially for them, no one is interested in interest. Credit costs dear. The government has provided help. It is a pity not to use it. Nor actually is it too late. Small suppliers could be sifting through the late payers and sending off supplementary invoices by the score. Or just bearing the cost.
L M Wise FCA
Barrister-at-Law
Leslie Wise has regularly written articles for the Solicitors' Journal, Solicitors' Gazette and Accountancy. His wide practical experience informs Debt Collecting London’s total approach to your debts and helps ensure a quick result.