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Charging interest on your invoices: pros and cons

Tip #2- Interest on Past Due Accounts: To State or not to State -What’s the point?

Well, the point is to motivate your clients to pay you on time and before other creditors. When you extend credit to a customer you are extending a courtesy. Some might argue you are doing it to get the business. That may be true, but it is also true that you are doing your customer a favor. With that favor come terms; you get to set the terms as the credit grantor.

What should the terms be? They can range from COD to payable on receipt, to 60/90 days. It is completely in your hands but you should be guided by practical considerations such as your industry’s norms and how credit worthy your customer is.

Past due invoices hurt your cash flow and cost you money. You should be compensated for that and let your debtor know in advance that you expect to be by charging interest.

Won‘t that alienate my customer?

Not really. Experienced business people are used to seeing that and understand they need to pay on time.

Should I insist they pay the interest too when they pay late?

Unless you are a large organization most waive the interest as long as the payment is not seriously delinquent. An invoice that is due upon receipt and is paid in 90 days should have some interest payable, but most of my clients will let it go unless it has been turned over to a third party for collection.

Is it legal to charge interest?

It is as long as there was an agreement before hand that you would charge interest on past due accounts. This isusually accomplished by stating it on your invoices, order confirmation, and credit application if you have one.

So as long as I have it on my documents I’m ok?

Yes and no. It will motivate your client but to make it enforceable in court you need to have it stated in very specificlanguage per the Interest Act or a judge will only award you a low court rate of interest.

You must spell out the specific monthly rate you are looking for AND the annual rate.

Eg. 2% per month (24% per annum) will be charged on past due accounts.

Is there a limit on how much interest I can charge?

Yes, anything more than 59% per year is deemed usurious, but judges will often not grant even lower rates if they deem it too high. I usually recommend to my clients that they stick to 2-2.5% per month (24-30% per year)

Just make sure you word it correctly.