Q. I'm tired of slow-paying customers and want to start
charging interest on late payments. How do I do it, and how much can I
charge?
A. There's nothing wrong with charging interest
to late-paying customers -- but don't think it will be a miraculous solution for
getting paid on time. If you don't have a good credit and collections policy to
start with, charging interest will only add to the amount customers owe you.
First, determine the maximum legal rate for your state; your banker should be
able to tell you. The most common rate charged for outstanding invoices is 18
percent annually (1.5 percent per month). Some people think if they use an
outrageous rate (like five percent per month; 60 percent per annum) customers
will have to pay on time. This is illegal (it's called usury) and can put you at
the wrong end of a lawsuit! You'll not only have to forgive the original amount
owed but probably pay three times the original amount in damages.
Once you establish a rate, you must notify customers that any balances not
paid by the due date will be subject to finance charges. This should be done on
any bill of sale or contract given to the customer. Note on all invoices that
unpaid balances are subject to finance charges.
Because there are specific state laws concerning charging interest or finance
charges, it's a good idea to discuss just what you will be doing with your
accountant, attorney or both. A few dollars spent up front could save you big
dollars later.