Charging interest for late payments: key considerations
Late payments threaten to derail your business by disrupting cash flow, but by charging interest on such funds you can deter debtors from exceeding terms and bring in further revenue to compensate. A director’s briefing from finance and accountancy experts ICAEW details the rights of firms and the process towards charging interest for late payments, and we explore the key considerations and learnings from this below.
Do you have the right?
For all sales to other firms and public sector bodies, you have a statutory right to charge interest for late payments. However, this does not apply to sales to consumers. A contractual agreement can be drawn up with a business customer to outline the terms should missed payment occur, and this is capped at 60 days after goods are received and a minimum of 8 per cent interest.
A payment becomes late simply when the agreed terms are exceeded, and this deadline can be defined in writing or verbally – although the latter is harder to prove. If a credit period is yet to be set, a default period is typically fixed by law depending on the country you operate in.
How much interest to charge
Calculating how much interest to charge is straightforward. If an interest percentage has been agreed earlier as part of a contract, you would multiply the amount owed by the percentage figure to get an annual amount. Should you not have an agreed percentage, you would simply multiply the amount by the total rate of interest set by the banks.
With this annual figure, you divide by 365 to get a daily amount, and multiply this amount by the number of days a payment has been late. Should part payment be received before interest is charged, the amount would be subtracted from the total payment owed before interest is charged.
How charging interest affects the business relationship
Although you have the right to charge interest, it would be wise to consider how it impacts on the business relationship before pursuing funds. The process will form part of your overall credit control process, and should therefore be a rigidly structured and efficient procedure. If it isn’t, and you have a negative history of chasing payments promptly, debtors may object to being charged interest suddenly. It’s also worthwhile to understand the industry practice overall, and whether your own procedure is in line with what buyers expect. Any sense that your firm is difficult to do business with or has poor credit management could cause customers to turn to competitors.
With an appropriate credit control procedure that includes effective steps towards chasing late payments, your business can safeguard revenue and prevent overdue funds turning into bad debt.
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