On 2nd November 2017, the Bank of England increased the base rate of interest from 0.25% to 0.5%. This is the first time that interest rates have been increased in more than a decade.
A rise in interest rates affects business activities as well as the buying habits of the customer. In this article, we look at the potential impact on business debt collection and the Late Payment of Commercial Debts (Interest) Act 1998.
Late payment can be a huge problem for businesses. According to the Federation of Small Businesses (FSB), SMEs in the UK are owed on average £6,142 in overdue payments by larger firms. This can cause severe cash flow issues for these SMEs and it has resulted in the closure of several companies over the years, motivating the Government to take action against the culture of late payment.
The aim of the Late Payment of Commercial Debts (Interest) Act 1998 is to assist the debt collection process by allowing businesses to add fixed sum compensation, interest and reasonable costs to overdue invoices.
What is the interest rate under the Late Payment of Commercial Debts (Interest) Act 1998?
The Act allows interest to be applied at a rate of 8% above the Bank of England base rate per annum from the date the debt becomes due.
What does the base rate rise mean for late payment interest?
It should follow that the interest rate under the Act is now 8.5% due to the base rate rising to 0.5%. However, that is not the case just yet and the late payment interest rate will remain at 8.25% until 31st December 2017.
Why is interest under the Late Payment Act remaining at 8.25%?
The base rate for late payments is fixed every 6 months for the purposes of calculating the interest owed on debts. Therefore the base rate on 31st December is used for debts that fall due between 1st January and 30th June and the rate in force on 30th June is used from 1st July to 31st December.
If the Bank of England does not change the interest rates next month (December 2017) the interest rate applicable on debts that become due between 1st January and 30th June 2018 will be 8.5%.
How do I know what interest rate to apply for an old debt?
It is possible to look back on historical Bank of England Interest Rates. however, for ease of reference we have set out the applicable interest rates below.
|Period Debts Were Due||Bank of England Base Rate||Late Payment Interest Applicable|
As mentioned, cash flow issues can arise if late payments are allowed to persist. Debt collection either in house or through a third party debt collection provider is essential for any business. This includes utilising the Late Payment of Commercial Debts (Interest) Act 1998 during your debt collection process to ensure you are sufficiently compensated for the delay. By taking positive action you will help change the culture of late payment.
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