Lessen your chances of having to recover debt.

Nowadays, businesses that sell goods to other businesses have the ability to charge interest on customer’s debts. The statute which governs late payment of debts is called the Late Payment of Commercial Debts (Interest) Act 1998 as amended by the Late Payment of Commercial Debts Regulations 2002 (SI 2002, No. 1674) (which is not retrospective).

The Act implies a term into a contract between businesses for the sale of goods for simple (not compound) interest to be paid on the late payment of debt. The interest runs from the date specified in the contract as the payment day or if none 31 days after delivery of the goods or the date the debtor has notice of the amount due, but if the amount is due before delivery 31 days after delivery. The current rate of interest is 8% p.a. over the official dealing rate announced from time to time by the Monetary Policy Committee of the Bank of England (Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order, 2002, SI 2002, No. 1675). A fixed sum for compensation for pursuing the debt is also payable the amount depends on the size of the debt. This implied term cannot be excluded from any sale of goods contract unless it is replaced by an expressed term covering a substantial remedy for late payment and then the Act is automatically excluded unless both parties agree otherwise.

To help prevent bad debts a company should consider the following:

Put an express term covering the payment of interest on late payments, in the sales agreement such as:-

“Payment will be due in full seven days from the date of delivery of the goods, interest will be payable at 4% p.a. above the base rate of Barclays Bank from time to time on late payments and compound interest, any payments not made within 31 days from delivery will allow the company to treat failure to pay as breach of contract and take all necessary proceedings to recover the debt”.

It is not advisable to make the credit period different from the credit period which is the normal custom and practice of the industry, because it might be found to be an unfair contract term.

Request that the directors of any company that you deal with on a regular basis enter into a personal guarantee or indemnity with your company in respect of payments that become due from their company;

Do a credit check on the owner’s of the company before you give them credit to establish the potential customer’s credit rating and to see if they have any unpaid County Court judgments against their name;

Insist on payment on delivery;

Give a discount for early payment and interest on late payment;

Employ a factoring company to collect debt and set prices to cover the payment of the factoring company in your costs;

Many companies also collect one of debts for business it is always best to instruct them to collect the debt as soon as practicable as the older the debt the more commission they take.

Ask for references from previous suppliers as to whether they were prompt payers. If you take up trade references check that they are from a genuine source;

If the business is a company, do a company search and obtain a copy of the company accounts to see if it is a financially healthy company. A company search will reveal the address of the company’s registered office, whether the company is in liquidation or receivership, you can also obtain information on any charges/loans registered against the company;

Ensure that your terms of payment and the price are known to the customer before the contract is entered into and obtain the customer’s signature to your terms on confirmation of any order;

Insert a clause into your terms and conditions which states “the ownership of the goods will not pass to the buyer until the buyer has paid for the goods in full”. This will also allow you to recover the goods if the customer does not pay for them.

If you would like this firm to prepare terms and conditions for your business, please telephone +44 (0)208 539 0075 or e-mail info@gmhewettsolicitor.com

This guide is intended as general information only, it does not seek to summarise the relevant legislation which is a complex and technical area of law. You should take specific professional legal advice prior to pursing any course of action.