09 November 2010 #Dispute Resolution
Most businesses include in their standard terms of business a provision that, if they are not paid on time, typically within 30 days, interest will be payable on their outstanding invoice.
The typical interest provision is linked to a bank base rate, for example:
"Interest on unpaid invoices will be paid at the rate of 2% above the base rate from time to time of x Bank plc...".
When interest rates were 8% or 10% this sort of clause had the desired effect: it was a sufficient encouragement to a debtor to pay on time, and a sufficient compensation if the debtor failed to pay.
The historically low interest rates, however, mean that these sort of clauses are now much less favourable to the unpaid supplier. A clause allowing 2% above base rate will currently only net you 2.5%. Very many small businesses (and even larger businesses) are paying way more than this for the borrowings.
So what is the answer? Now may be the time to delete this provision altogether from your terms of business. If you do so and are in the business of provision of goods or services, then you will instead be able to take advantage of the provisions in the Late Payment of Commercial Debts (Interest) Act 1998. This automatically applies interest at a specified rate (currently 8% above the base rate of the Bank of England) on overdue payments.
Is there a pitfall? One downside is that if there is no reference to interest in your terms of business then your customers may not realise that there is a penalty for non-payment. More importantly, the Act does not apply at all to contracts with consumers, and so, if you deal regularly with consumers, you will need to have different terms of business specifying interest rates in your dealings with them.