As a supplier, receiving timely payment of invoices is crucial for keeping your business running smoothly. Late payments can disrupt cash flow, leading to challenges like difficulty paying your own suppliers or staff, and in some cases, even threatening your business’s survival.
Thankfully, the Late Payment of Commercial Debts (Interest) Act 1998 (LPCDIA) was introduced to address this issue.
In this article, we explain what the LPCDIA is, how it works, and how you can use it to pursue late payments.
What is the Late Payment of Commercial Debts (Interest) Act 1998?
The LPCDIA is UK legislation designed to combat the issue of late payments in commercial contracts. It applies to all business-to-business contracts as well as agreements between businesses and public authorities, like councils or government bodies.
The act gives suppliers a statutory right to charge interest on late payments and claim a fixed sum to cover debt recovery costs.
How Does the Late Payment Act Work?
Under the LPCDIA, if a customer doesn’t pay an invoice on time, the supplier is entitled to charge interest on the overdue amount.
Currently, the interest rate is 8% above the Bank of England base rate, and it accrues daily from the day after the payment is due. The longer the payment remains unpaid, the more interest you can claim.
In addition to interest, you can also claim a fixed sum to cover debt recovery costs. The fixed amounts are:
- £40 for debts up to £1,000
- £70 for debts between £1,000 and £10,000
- £100 for debts over £10,000
These fixed sums help cover your reasonable costs in pursuing the debt, like sending reminder letters or hiring a debt recovery agency.
How Can Suppliers Use the LPCDIA in Their Cash Collection Process?
If you’re a supplier struggling to collect payment, the LPCDIA can be a powerful tool in your cash collection process. Here are the steps to take:
1. Check Your Payment Terms
Before you can claim interest and recovery costs under the LPCDIA, ensure your payment terms are in compliance. The act states that payment should be made within 30 days of receiving an invoice, unless other terms have been agreed in writing.
2. Send Reminder Letters
If payment is overdue, your first step is to send a reminder to the customer. The letter should outline the amount owed, the payment due date, and a warning that interest and recovery costs will be added if payment isn’t received soon. You can set a specific date for payment. This reminder can be sent via email.
3. Engage a Debt Recovery Agency
If the customer still hasn’t paid, you may need to involve a debt recovery agency. The cost of this service can be included in the fixed sum you claim under the LPCDIA.
4. Claim Interest and Fixed Costs
If the debt remains unpaid, you can formally claim the interest and recovery costs, either through the courts or with the help of a debt recovery agency. These additional costs will be added to the amount the customer owes.
Conclusion
The Late Payment of Commercial Debts (Interest) Act 1998 provides a valuable mechanism for suppliers to chase late payments.
By claiming interest and fixed costs, suppliers can recover some of the costs associated with chasing a debt, and discourage customers from paying late in future. Visit GOV.UK to find out more.
Need tips on how to collect the monies owed? Visit our guide to “Effective Strategies for Business Debt Collection and Invoicing” page.
