The perpetual struggle to ensure customers pay their invoices on time is disproportionately debilitating for small and medium-sized enterprises (“SMEs”), especially in adverse economic conditions when budgets are squeezed and access to finance is limited.
However you can employ a number of contractual tactics to encourage customers to respect payment terms.
- Review your standard terms to ensure that your payment period is clearly defined and of a suitable, practical length.
- You have a statutory right to interest under the current late payment legislation, which is 8 per cent above the bank of England’s base rate for payments overdue by 30 days. SMEs should use the statutory provisions as a benchmark for their standard terms, and as leverage to negotiate shorter contractual payment periods or lower interest rates with their customers.
- Consider including provisions in your standard terms that require a fixed sum to be paid as compensation in the event of a contractual breach. You may wish to specify that, in the event of late payment, compensation of a certain amount is payable to cover the administrative costs for pursuing that payment. This type of clause is known as a liquidated damages clause.
- Liquidated damages and interest clauses are a practical way of dealing with minor breaches such as the late payment of bills without putting your long-term relationship with your customer at risk. They can be an effective means of encouraging proper performance since the financial consequences of breach are unequivocally set out. For liquidated damages and/or interest clauses to be enforceable, the sums specified must reflect a genuine pre-estimate of the wronged party’s loss and be commercially justifiable. It is wise in all instances to record the reasoning, including details of any negotiation with the other party, to justify the levels of compensation set out in your clauses.
- If payment is not forthcoming, consider other means of seeking compensation from your customers and provide for those remedies in your standard terms, such as adding a clause that entitles you to charge for instructing a debt collection agency to recover the debt. Again, you are entitled to limited compensation under statute, but this is unlikely to be sufficient and supplementary arrangements should be made.
- A “retention of title” clause will give you the right to reclaim goods delivered to your customer under the contract until full payment is received.
- Ensure your standard terms specify that time for payment is “of the essence”, so that, as a last resort, you will be permitted to terminate the contract if an invoice is paid late and sue your customer for damages. However, to ensure that such a clause is not struck out for being unfair, it is typical to allow customers a grace period to put right the breach.