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Repaid with interest

8th December 2005
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Page 38, 8th December 2005 — Repaid with interest
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Which of the following most accurately describes the problem?

n our second feature on debt recovery,

Jayne Lees and Cheryl O'Brien look at

:harging interest on bad debts.

Late payment is a serious problem for the road transport industry research shows it is the sector with the longest gap between invoicing and payment.

So what can operators do to recover their money if payment is not forthcoming? In November 2002 the government amended the law governinglate payments by introducing the Late Payment of Commercial Debt Regulation Act 2002. This extended the right to claim interest on late payment of commercial debts to all businesses; it also introduced compensation charges. The act included two retrospective measures to protect operators who signed contracts before 2002.

• Small businesses can claim statutory interest from large businesses and the public sector Illo for contracts agreed after 1 November 1998.

o Small businesses can claim statutory interest from other small businesses for contracts agreed after t November 2000.

This legislation only applies to business-tobusiness deals—it does not affect consumers.

rig t to c arge interest ut it is not compulsory

The rate of interest you can charge is set at the Bank of England base rate plus 8%. So when calculating the interest you must take into account any changes in the Bank of England base rate during the period of the :harge. You can charge interest if an invoice remains unpaid after the agreed due date or after 30 days. Interest can be charged up to the date of payment and any payment made by the :ustomer must be applied to any interest :harges first.

There is a statutory right to claim interest but it is not compulsory so it is up to you to decide whether to exercise that right. Some zompanies are nervous Df the effect of :harging interest Dn their relationship with a customer — when margins are so Eight, risking the loss of even slow paying :lients demands careful thought.

ere is a statu so it is up to

How much can you claim?

[he act allows you to claim compensation for debt recovery costs in respect of each overdue mvoice. The scale of compensation stands at: ▪ Debts of up to £999.99: £40 s Debts of £1 ,000-9.999:f70 • Debts of £10,000 and above: £100 You have up to six years from the date of the original invoice to apply the charge.The act was introduced to encourage prompt payment in business-to-business transactions. You must first ensure your customer is fully aware of the details of the overdue debt, how they can pay and the consequences of not paying when due.

Refer to your rights In order to avoid confusion you should make reference to your right to charge statutory latepayment interest and compensation in your contracts, terms of business, invoicing and statements of account in the following terms: "Please note that we may apply both statutory interest and collection costs in accordance with the Late Payment of Commercial Debt (Interest) Act 1998 and Late Payment of Commercial Debts Regulation Act 2002 against all overdue accounts."

Similarly, you should include the following warning in your credit-control 'chaserletters: "We are shortly due to apply both statutory interest and collection costs in accordance with the Late Payment of Commercial Debt (Interest) Act 1998 and Late Payment of Commercial Debts Regulation Act 2002, in line with our policy.We are reluctant to involve you in extra costs and would urge you to let us have settlement in the next seven days to avoid this course of action."

Most customers will pay when reminded, but for persistent late payers the late payment charge can work in several ways.

Use an early-warning letter as a deterrent for late payers. Once a late-payment invoice has been issued, it can be used as a bargaining tool — for example, you might agree to waive the interest or part of the interest on this occasion but would urge your customer to adhere to your agreed payment terms in future.

Late-payment charges can be used as an effective penalty against persistent late payers (and of course they can help to cover the cost to your business).

By using the act as an integral part of your business terms, you might also re-educate your customers to pay you sooner and improve your business collection time and cash flow. •

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Organisations: Bank of England

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