As a small or medium-sized business owner, getting payment for outstanding invoices can sometimes be a daunting task. Late payment of invoices can cause serious harm to your business, especially if you rely on prompt payment for your own cashflow. This situation can even result in the worst case scenario of insolvency. Therefore, it's important to know how to get payment, even when all your previous attempts have failed.
Steps for recovery of an outstanding invoice
We set out below the available options for recovering an outstanding invoice.
LETTER BEFORE ACTION
The first option to consider would be to send a legal letter before action (LBA). This is a formal letter that demands payment within a specified deadline. Upon receipt of the LBA, most debtors tend to pay up immediately. The cost of sending an LBA is minimal, with fixed costs available on most law firms' websites. For our costs, download our Charging Structure.
LATE PAYMENT OF COMMERCIAL DEBTS (INTEREST) ACT 1988
When a creditor is a business and the debtor is also a business, it may be possible to claim under the Late Payment of Commercial Debts (Interest) Act 1998. This allows you to charge a business interest that currently stands at 8% plus the Bank of England base rate for business to business transactions (which is currently 4.5%). This means you could charge interest to a debtor of 12.5%. However, you cannot claim this interest if there is a different rate of interest in your contract. The act has two principles – to compensate creditors from late payment of debts and to deter late payment.
FIXED SUM FOR LATE PAYMENT
Another option is to charge a business a fixed sum for late payment on top of claiming interest as above. The amount you can charge depends on the amount of the debt and can only be charged once for each payment. The fixed sum compensation is calculated according to the following bands:
- Up to £999.00 – £40.00
- £1,000 to £9,999.99 – £70.00
- £10,000 and above – £100.00
LATE PAYMENT OF COMMERCIAL DEBTS REGULATIONS 2013
The Late Payment of Commercial Debts Regulations 2013 is another Act that allows the creditor compensation for its reasonable costs of debt recovery above the fixed costs currently recoverable under the law. However, you can only claim this if there is no provision for legal fees in your contract.
RECOVERY THROUGH THE COURTS
If the debtor business still fails to pay after receiving an LBA, and they are still trading, the final step is recovery action through the courts. County Court proceedings may be initiated, which can result in a Judgment Order or High Court Enforcement Officers for debtors with large sums owing. For more serious cases, insolvency might be the only option. Statutory Demand or Winding Up Proceedings may be initiated under such circumstances.
Conclusion
Late payment of an outstanding invoice can be a frustrating experience for any business owner, but there are several methods to get payment. It is important to be aware of your legal rights as a creditor and to consider your options carefully before taking action. Working with a specialized legal team can help you navigate the process and increase your chances of receiving payment. At Paris Smith, we have been helping businesses recover outstanding debts for years, and we can help you too. Get in touch with a member of the Debt Recovery team for expert advice and assistance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.