Late payment penalties - good or bad business?

We have always charged commercial customers late payment interest. When the Late Payment of Commercial Debts (Interest) Act 1998 came in we charged the statutory interest, and when penalties came in with The Late Payment of Commercial Debts Regulations 2002 we started to charge those.

Is this good for business or bad?

There is a down side - occasionally someone that thinks it is OK to routinely pay late will leave and get service from someone else. That is not ideal, but on the other hand, neither is paying late. We try, with such people, to find payment terms with which they are happy. As an ongoing service we can do what payment terms you like - if you want 6 months to pay invoices, fine, we'll charge you for the month that is 6 month hence, and give you 6 months to pay. We can be very accommodating - but on a serious note, the standard terms like 30 days, and "end of following month" we do fine as well.

We have had a few cases, which we don't really do any more, where we agreed not to actually invoice the late payment penalties, but show them on the statement anyway. After many years the customer left and was surprised to get invoiced the statutory late payment charges dating back many years. People need to know that late payment penalties are a part of every commercial contract in all of the EU. We are not being special here...

But late payment, and in particular the attitude to the statutory late payment penalty, tells you a lot about the finances of a customer. Some people make mistakes and are very apologetic - they get our sympathy and get let off (this time). Those that pay late and then rant about it are different - they usually have a problem and are failing to hide it.

On one rare occasion we paid a supplier late by mistake and insisted they get their late payment charges. We take a lot of care to pay suppliers on time.

We just had a perfect example of where this works in our favour just today. We have very few where it does not work in our favour, especially with a policy of letting people off the first time.

A customer that had a very strong attitude on late payment. Indeed, he said

It is, however, my policy not to deal with companies that impose any kind of late payment charge and I am surprised that previous payments have been made.  Unless I get confirmation that no further late payment charges will be added to my accounts, I will take steps to cancel all services with AA.

Well, I replied...

As I am absolutely sure you know, I could make a signed notarized contract, signed in blood and sealed with the company seal, that we will never charge you late payment charges again. Then I could still charge them and enforce them via the court. This is because, by law, such an agreement is illegal and void.

However, I am prepared, none the less, on my honour as a gentleman going to state that we will NOT charge any more late payment charges provided that you, on your honour, as a gentleman, agree not to pay any invoices late in future.

I trust that you agree that is a very fair deal.

No reply. But he then moved all lines away, having now paid in full, including the penalties.

That was last month. Today - we received the insolvency notice from their liquidators, and they owe nothing.

Yay for late payment penalties... It could have been very expensive if they were still customers.


  1. Probably an issue of semantics rather than substance, but I am not sure that a contractual term which purports to oust interest at the statutory rate (and in the absence of another substantial remedy) is "illegal" — it is not a crime, or even a civil wrong, as far as I know, to enter into a contract with such a term. The impact, as you say, is that the term is not effective.

  2. I believe promissory estoppel may stop you from enforcing late payment charges if you promise someone that you won't enforce them and they then rely on that promise. I doubt it would arise in the above case since the person didn't rely on that promise, but worth bearing in mind.

    (Disclaimer: I am a solicitor, I am not *your* solicitor).

  3. >>>>>It is, however, my policy not to deal with companies that impose any kind of late payment charge and I am surprised that previous payments have been made. Unless I get confirmation that no further late payment charges will be added to my accounts, I will take steps to cancel all services with AA.

    Your response should have been something like:

    "We will be more than happy to ensure no late penalties are applied to your account. All you have to do is pay on time. Unless I get confirmation that all of your payments will be made on time, I'll be forced to find another customer."

    1. Well, the regulations specifically limit such agreements, else that would be part of terms on every purchase order. Also, I would also have relied on the promise (in contract) for them not to pay late. But I am not a lawyer.

  4. Many years ago I was working for a company who's policy seemed to be to pay everything as late as they could. Got to a point where the company was blacklisted by all of the major mobile network operators (which was a problem, given that the company's business was developing systems that use the mobile networks...) and on several occasions they've had an office full of staff sitting there twiddling their thumbs for a day while they wait for someone to pay the power bill and get the electricity turned on again.

    I hear they are still operating in exactly the same way and I've been told that their investors actually insist on them operating like that. Seems like a completely bonkers way to run a business - I'm sure any money they might have saved by paying late has been well and truly eclipsed by the cost of the problems this policy has caused.

    1. I even had to Form 4.1 them for my salary after they made me redundant! Must admit that I wasn't especially sorry to lose that job.


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