Interest on Late Payments

3. Should You Charge Interest?

Although the rate of interest is high, the total amount of money involved may only be a few pounds. Think what charging interest and costs might do to your relationships with your customers.

3.1 Consider how customers are likely to react.

• Determine if late payment is limited to a few of your customers, or if most of your customers pay late.
• Ask front-line employees (eg in sales) for their opinions.

3.2 Assess the effectiveness of your credit control system.

• If you are ineffective at collecting money owed to you, customers may strongly object to being asked to pay interest and debt-recovery costs.
• Make sure you are using a credit control system that is appropriate to your business needs.

3.3 Find out what other businesses in your industry are doing.

• Your trade association may be able to provide advice.
• Ask your customers if their other suppliers charge interest on late payments.

3.4 Remember that it is not compulsory to charge interest on late payments or debt-recovery costs.

• You retain the right to define your own terms and conditions. But customers cannot impose a contract denying you 'substantial' interest on late payment. And in the absence of any specific payment terms, the Act will apply.
• You can only claim the costs under the Act if you claim the interest under the Act.If you do not claim interest, or you claim it under a contractual provision or the provisions of a different Act, you cannot claim the costs.