What contractors should do about late payment

Most small businesses have to deal, at one time or another, with the problem of late payment. It's an awkward situation: on the one hand, you need to get the money that you live on; on the other hand, you don't want to go overboard chasing agencies and clients so that you become known as strident and unreasonable.

If you suffer from late payments, the law is on your side. Regulations give you the power to charge interest and claim compensation if invoices are not paid on time.

It is wise to know your rights, and then to decide whether you want to play it soft or hard with a given agency or client.

Know your late payment rights

Repeated late payment might well merit your attention for another reason, though. When it comes time to get the last payment under the terms of the contract, it may not just be late, it may never come. To remind the agency that you are very determined to receive what is due to you, taking a consistently firm line on late payments can be useful.

Or you may feel that repeated late payment is reason for terminating the contract. This is harder to do, but you may be justified in doing so if certain conditions are met.

What does the law say about late payment?

First, what does the law say? Adam Home, a credit manager at Lancashire based debt collection company Safe Collections, explains. ''Under the terms of the 'Late Payment of Commercial Debts Regulations 2013', you have the right to charge interest plus fixed costs on debts that are paid beyond your contractually agreed terms.''

Unlike its earlier iterations, the 2013 late payment legislation allows interest and fixed costs to be charged between businesses of any size and from the moment your invoice goes beyond its contractually agreed payment date.

As such if your invoice is paid late you are entitled to add interest at 8% over the 'official dealing rate' (find this on the Bank of England website). If that rate is currently 0.25%, the interest rate you are entitled to is 8.25.%. You can calculate the interest due using the Late Payment Calculator on this site.

Send an invoice and collect

If this begins to add up to serious money, send an invoice for the interest and costs with a polite reminder letter. Late payment legislation has been around since 1998 and many companies are aware that they have to pay this if they pay late. In a majority of cases it will act as a wake-up call and they'll start paying you on time (and probably start showing you a bit more respect).

Remember that if the company refuses to pay these charges or continues to delay your payments, that you can engage a reputable debt collection company or solicitor to recover the balance. And under the revised late payment legislation your “reasonable costs” incurred in debt collection can also be added to the balance owed, along with the statutory costs and interest.

Can you terminate the contract due to late payment?

But what if you want to terminate the contract? because of the late payments. Can you do so?

Says Home: ''It is possible to treat late payment as a breach of contract, but generally speaking one or two late payments is unlikely to constitute a significant breach in and of itself.''

Some contracts have terms that make this clear but for those that don’t Home recommends that contractors ''Seek appropriate legal advice on the terms within the contract and take steps to formally notify the client that prompt payment is essential to the contract and that you will consider it breached if payments continue to be made late."

Home adds "If the company still pays you late, you should then have the right to terminate without further delay, and you may be able to seek to recover damages in addition to the principal sum owed. As with any contractual issue we would strongly encourage contractors to secure independent legal advice prior to terminating a contract to ensure they do not prejudice themselves or their rights to receive payment. "

So know your rights, evaluate what you think is the most important aspect of the problem, and proceed accordingly. But one thing should be clear: you don't have to accept late payment and the law is on your side if you choose to challenge it.

Updated: Tuesday, May 23, 2017

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