Interest on Overdue Accounts

Q:        I charge 2% per month on overdue invoices, but when I sued a customer on an account, the Court only gave me 6% per year.  Why?

A:         This is a frequent problem for businesses that have to sue to collect overdue accounts.

Typically, a customer orders product or services, the product is delivered or services rendered, and the business then delivers the invoice.  Tucked neatly at the bottom is some fine print that states that interest will be charged at the rate of, for example, 2% per month.  So what is the problem?

The interest on overdue accounts can add up to a lot of money over time, and it is especially important to businesses that have to finance their receivables, as they are often paying their bank more than the rate of interest that the Court will give them when they sue. 

The Courts look at the issue in this way: when you initially made the agreement to supply goods or services, did you advise your customer that overdue accounts attract interest at, for example, 2% per month?  In most cases, this does not happen.  If not, then the Court takes the view that you, as the supplier, have changed the terms of the contract after the deal has been made, and this is illegal.

So how can you get around this?  If you quote to your customers, ensure that the quote refers to the interest rate on overdue accounts.  If you have a price list or catalogue that people order from, the same rule applies: make sure that the interest rate is referred to in the printed material.   That way, when people order your product, i.e. make the deal, they are aware of the penalty for late payment.