Is it can’t pay or won’t pay?

From late payments to spiralling debts, failing to control cash flow will almost always spell disaster for any business. But the good news is the law may be on your side when it comes to getting back money owed. Litigation Manager at Eaton Smith Solicitors, explores how business can use the law to their advantage when chasing money from difficult clients A KEY problem that can arise for SMEs is the differing payment terms between different companies. Larger companies often insist on longer payment terms and can be slow to pay up.

This can have a real impact on any smaller businesses they deal with, which can often feel trapped and not in a position to negotiate for a more reasonable arrangement.

What’s surprising is that although businesses often spend a great deal of time and resources keeping a close eye on their cash flow, many are not aware of the legislation available to them which could help when it comes to controlling the purse strings.

The Late Payment of Commercial Debts (Interest) Act 1998 is a piece of legislation that’s largely underused by businesses.

This allows businesses to reclaim debts arising from business to business contracts at an interest rate of 8% above the base rate – as well as allowing them to claim a small amount of compensation for outstanding debt.

Subsequent Regulations introduced new rules relating to payment periods, and the dates from which statutory interest runs on commercial debts.

One of the clauses contained within these new rules stipulates that where a creditor has to chase a debtor for an unpaid invoice, they are now allowed to claim for ‘reasonable costs of recovering the debt’ and are no longer restricted to a fixed sum of compensation, as they had been under the original Act.

This allows for the recovering of reasonable costs resulting from hiring a solicitor.

To be entitled to rely upon the Act, the debt must:

Arise from a business-to-business transaction.

Not be subject to a different contractual rate of interest.

Been or have been outstanding past any agreed date for payment.

For more information and advice about how you can protect your business against late or unpaid payments it is important to speak to a legal expert.