Interest on debts – can you claim interest on money owed to your business?

If your business is owed money, the impact on cash flow can be considerable. Since interest rates have improved you could also be losing potential returns on investment, so it is important to keep a tight control on business debts.

When chasing late payment, you can ask for interest on the money owed. The most straightforward way to do this is to apply interest on money outstanding as agreed in a contract you have with your debtor.

Even if you do not have an interest clause in your contract, it is still possible to ask for interest in certain circumstances.

Late Payment of Commercial Debts (Interest) Act 1998

If you have a contract with a commercial entity which owes a debt to your business, then it is likely that the original contract agreed between you will contain certain terms specifying that interest is claimable on any money that is not paid in accordance with the terms of the contract.

The contract should specify which interest starts to accrue. This will typically say that interest runs from the date the payment became due, to the date that payment is received. The contract should also specify the agreed rate of interest upon late payment.

However, if you do not have such a term in the contract, then the majority of commercial debts (which means business debts, rather than from a private consumer) fall under the Late Payment of Commercial Debts (Interest) Act 1998.

The Act provides that in the absence of an agreed contractual rate of interest, a business can claim statutory interest on money that is paid late.

This statutory interest rate is currently 8% over the Bank of England base rate.

Depending on the economy, 8% over the statutory base rate can be significant, and can often be a lot higher than a rate agreed in a business contract.

However, you should note that if your contract contains a different rate, you must use your contract rate.

How can we help?

We have many years’ experience in this area and can advise you in relation to recovering money due to you. Contact Sian Mullane, Senior Associate in our Dispute Resolution Team ([email protected] or 01473 611211) to discuss your options.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.