Since November 1 1998, small companies have been able to charge customers interest on debts they pay late, under the Late Payment of Commercial Debts (Interest) Act 1998. It's part of a government campaign to change Britain's late payment culture, which leads eight out of ten companies habitually to pay their bills late. Small businesses can be forced to borrow money to keep going while awaiting payment - some even go bust.

How does it work?
Small companies can now charge large companies interest at 8% over base rate* on overdue business debts. A small company is defined as one with 50 employees or fewer; big companies are all the rest. The right will be extended over the next few years until eventually all companies are included.

Is the public sector included?
Yes.

How could I use it?
You can set your own credit period when you agree contracts and then include a clause stating your right under the law to claim interest if your big company customer doesn't pay up on time, though you don't have to. If you don't set a credit period or state your right to interest in the contract you can still invoke the law, but spelling out your rights may help you get paid more promptly. If no credit period is specified in a contract, it will be assumed to be 30 days from delivery or invoice, whichever is the later. The law can be applied whatever the size of debt.

What if a customer refuses to pay?
Ultimately you could pursue it through the courts (including the Small Claims Courts for amounts up to £5,000) though it's better to chase it up before it gets that far. The Act also allows you to separate the interest from the principal debt so you can pursue the interest alone even if the big company pays the initial bill. You can also assign the interest to a third party such as a factory.

Won't big companies try to get round it somehow?
Not necessarily. Companies are banned from writing contracts to get round it, but no legislation will stop firms that are determined to pay late from dictating terms to their suppliers. It's a question of changing the culture of late payment, though since the Government announced the legislation would be brought in, surveys among small companies show that the scale of the late payment has reduced.

But will it really pay to sue a major company?
This is the problem, and it explains why many experts opposed the law. They were afraid that a large corporation dragged through the courts would simply refuse to deal with the firm again. So deciding whether to use the law or not is a tough question which needs considering in depth.

What else is being done?
There are also plans to 'name and shame' late payers - in March the Better Payment Practice Campaign plans to publish a list of the top 10,000 UK companies ranked according to their payment performance. The idea is that the worst offenders will be shamed into paying up on time. Small businesses will also be able to check out the performance of big companies before agreeing contracts with them. Performance tables for Government departments have already been published - get them from the Better Payment Practice Group on 0171 369 9333.

Where can I find out more?
Several places; the Better Payment Practice Campaign.

Get free guides by calling 0870 150 2500, including a user's guide to the Act, a better payment wallchart, and a guide to paying and being paid on time.

The Forum of Private Business, a small business pressure group call 01565 634 467 for free copies of its guides to collecting late payments.