In the current economic climate, business customers often deliberately delay payment of invoices. Protect your business and improve your cash flow, by exerting your right to claim interest on late payments.
Is an interest clause required in the contract?
No. There is no requirement to have an interest clause in your contract. You have a statutory right to claim interest on late payments from a business customer (BTB). The statutory interest rate applicable is the Bank of England Base Rate + 8%. At the time of writing the currently applicable rate is 8.5%.
What interest rate can be specified in the contract?
You can choose which rate shall apply. This can be a number i.e. 7%, or a reference to an index i.e. the European Central Bank base rate, or a combination of both i.e. the Bank of England base rate + 2%. The interest rate specified can be higher or lower than the statutory rate.
Does the contractual or the statutory interest rate apply?
If you specify an interest rate in your contract, the statutory rate will not apply, even if the rate specified is lower.
Disadvantages of having a contractual interest clause
1. By specifying an interest rate in your contract you are inviting a business customer to negotiate a lower rate.
2. If you have a weaker bargaining position, you may have to agree to a rate much lower than 8.5%.
3. Time and money could be wasted on lengthy discussions about which index to use and the % rate applicable.
4. Many business customers are not aware of your rights. Saying nothing about interest in the contract can result in avoiding protracted negotiations on this issue, and the statutory rate will apply automatically.
Can a business customer exclude your right to charge interest in the contract?
No. Such a clause will be invalid and unenforceable.
Do you have to enforce your right to claim interest?
No. It is up to you to decide, if, and when, it is appropriate to enforce your right to claim interest from business customers.
Calculating interest
Your terms and conditions should state when payment is due i.e. within 14 days of the date of invoices. Interest will be calculated and payable from day 15.
As a matter of good practice send your customer a payment reminder before exercising your right to claim interest. They may simply have overlooked your invoice!
IMPORTANT NOTE: please note that the above only applies to BTB contracts.
Help
If you need assistance with interest clauses or your terms and conditions generally contact:
irene.bodle@bodlelaw.com
www.bodlelaw.com
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