Late payment can put significant pressure on a business, particularly where you have already incurred costs providing goods or services. A well-drafted contract can provide important protection if a customer fails to pay.
Clear Payment Terms
Your contract should clearly state when payment is due and how the payment period is calculated.
If you are dealing with a larger business, be cautious about agreeing to lengthy payment terms simply because they are contained in the customer’s standard terms. A long payment period can have a significant impact on your cash flow, particularly where you have already incurred costs in delivering the goods or services.
Interest on Late Payments
A clearly drafted interest clause can encourage customers to pay on time and compensate your business for the cost of delayed payment.
For qualifying business-to-business transactions, statutory interest is generally available at 8% above the Bank of England base rate.
Using Direct Debits for Ongoing Services
If you provide regular or recurring services, consider requiring customers to pay by direct debit. This can reduce the administrative burden of issuing invoices and chasing overdue payments each month.
Retention of title clauses
A retention of title (ROT) clause can be an effective tool for protecting your position when supplying goods on credit. It provides that ownership of the goods remains with the supplier until they have been paid in full.
Depending on the circumstances and the wording of the clause, this may allow you to recover unpaid goods that remain identifiable and in the customer’s possession.
Rights to suspend services or deliveries
The contract should give the supplier an express right to suspend further work, services or deliveries when invoices become overdue.
Without a suitable contractual provision, stopping work or withholding deliveries can create legal risks. Clear suspension rights can help you respond quickly when payment problems arise.
Termination Rights
Your contract should also consider what happens if non-payment continues.
A well-drafted termination clause can give your business the right to bring the relationship to an end following a specified payment default, subject to the terms of the contract and any applicable legal requirements.
Changes to Payment Terms
The UK Government has proposed reforms to business payment practices. This includes a 60-day maximum payment term for relevant business-to-business transactions, subject to certain exemptions.
The Government also intends to strengthen the rules on statutory interest and introduce measures concerning the time within which businesses can dispute invoices.
Measure concerning the time in within which businesses can dispute invoices, as well as financial penalties for persistent late payers also seem to be apart of the recent proposals.
As these proposals develop, businesses should keep their standard terms and payment practices under review to ensure they remain compliant with any new requirements.
Bottom Line
The best time to protect your business against non-payment is before the contract is signed.
Clear and carefully drafted contractual provisions can help manage cash-flow risks and give you greater protection if a customer fails to pay. Payment terms, interest provisions, retention of title, rights to suspend performance and terminations provisions should all be considered when putting a contract in place.
Taking legal advice early can help you avoid costly problems later. If you would like advice on your business’ contract or a payment dispute, please get in touch with our Commercial team to discuss how we can help.
Contact us: commercial@berrysmith.com