Can companies charge interest on late payments?

Late payments made by customers can often have a great impact on business owners, as their business might get put on hold due to a lack of resources and money.

This is why it’s important to know how to deal with late payments and when is the right time to charge interest on them.

Before anything else, for a business owner, it’s crucial to think about what charging interest might do to their relationship with customers.

First of all, they need to predict their customers’ reactions, talk to their employees and ask for their opinion. Also, they need to establish whether only a few of the customers pay late or the majority of them.

Finally, if they get no response from their customers for a long time, companies do have a right to charge interest on late payments.

How to deal with late payments?

Before you decide to charge interest on late payment, make sure you have a working system for your customers that is appropriate to your business needs.

Charging interest should be your last option. Typically, if it comes to charging late fees, businesses go for a flat rate or a percentage of the total owing.

A flat rate is an amount that is added to the total owing every month in which the invoice remains unpaid and it doesn’t change. It’s up to the vendor to define the exact amount of a flat rate. 

On the other hand, a percentage of the total owing means that it’s a predetermined percentage of an invoice that is added each month the invoice remains unpaid.

When to charge late fees?

Late fees should only be charged if agreed to previously. 

Otherwise, a business has no right to charge them, as there is no agreement. 

This means that only if it’s accounted for in the original contract, then you should consider charging a late payment fee. That’s because the additional fee was agreed upon by the customer who failed to meet your payment terms.

Also, the interest rates for late payments should be carefully planned. A percentage higher than 5% can cause trouble and negotiation.

If the fee isn’t accounted for in the original contract or any other form of agreement, there’s also a way to charge it. 

However, in this scenario, be aware of the fact that you’ll probably be sacrificing your future business with that client, so think twice before doing anything.

How to act when a customer doesn’t pay an invoice?

If a client didn’t pay on time, be patient and don’t immediately charge a late fee.

Go step by step, as you never know their reason for being late on payments. 

First of all, send an email with the original invoice attached to it.

This way you’re politely reminding your client to make a payment. 

Attaching the original invoice will make it easier for them, as they don’t have to waste time on finding the invoice themselves.

After a couple of days, if you’re still not getting paid or your customer doesn’t answer at all, you can try contacting them by phone. 

If there’s still no answer, leave a message and try again in 48 hours. Make sure you keep a record of the date and time of emails and phone calls.

Finally, if nothing works, you can turn to a collections agency for a legal consultation. However, wait at least a couple of months before taking things to court.