Interest on overdue accounts - how do you do it?

Postforce · Dec 22, 2009

Hi all

Going through a pre-festive cashflow crisis - punters dragging their heals on paying! Decided enough is enough - no more Mr Nice Guy! - and from new year will revamp invoice to show that beyond 30 days interest is chargeable.

Do you do this - if so what percentage do you quote - how do you word it - does it work?

I had one supplier who added a late payment charge to the invoice as it went out and you knocked it off if you paid on time - good idea?

Tks in advance

matt.chatterley · Dec 22, 2009

Postforce said:
Hi all

Going through a pre-festive cashflow crisis - punters dragging their heals on paying! Decided enough is enough - no more Mr Nice Guy! - and from new year will revamp invoice to show that beyond 30 days interest is chargeable.

Do you do this - if so what percentage do you quote - how do you word it - does it work?

I had one supplier who added a late payment charge to the invoice as it went out and you knocked it off if you paid on time - good idea?

We let KashFlow work out the interest for us when we have to - works great!

You can however get a lot of information here: http://www.payontime.co.uk/ - or you could also check with BusinessLink as I believe they have published a leaflet which details your rights/entitlements/etc.

We just add a line to the invoice stating "Interest incurred on overdue payment" or similar, though, in answer to that point. It's a pretty rare occurance mind you!

seanstevens · Dec 22, 2009

The payontime website is a useful resource as it contains a calculator to work out exactly how much the interest should be.

As Matt mentions having a line on either your invoice or in your T&C's makes the job easier.

seanstevens · Dec 22, 2009

Postforce said:
I had one supplier who added a late payment charge to the invoice as it went out and you knocked it off if you paid on time - good idea?

Just noticed this at the end of your post.

I'd personally say this is not a good idea. If you quote and then you send an invoice with a different amount on, who would pay it? It just gives an excuse to delay payments waiting for a correct tax invoice which defeats the object of the interest charge.

matt.chatterley · Dec 22, 2009

seanstevens said:
The payontime website is a useful resource as it contains a calculator to work out exactly how much the interest should be.

As Matt mentions having a line on either your invoice or in your T&C's makes the job easier.

Ah. Yeah. I didn't mention that, thanks Sean

Our standard T&Cs of business (which are sent to every client the first time we work with them) state our payment terms - 30 elapsed days (explicitly states 'not 30 working days' as we've had a quibble on that in the past) - and that we will apply the late payment of commercial debts act, etc, once these are exceeded.

We generally give our clients a fair bit of rope - but occasionally we find them all tangled up in it and still not paying

GRDCredit · Dec 22, 2009

As said before the payontime website is a good resource but at the risk of stating the obvious just by threatening to add interest to your invoices is not going to make people pay you quicker!

For example, if you have a regular customer who always pays 10 days late can you afford to p**s him off and charge interest which you may get but will probably lose you the customer.

You do need to think wider about your credit policy (and yes, I know I would say that wouldn't I!) - for example what action do you take when an invoice is overdue? Do you stop that customer? Do you write a nice letter? Do you write a nasty letter? Do you do nothing for another 7 days? etc

Interestingly I had a quick look at your website and cannot see any where on there your terms and conditions (forgive me if I am not looking in the right place!) How do your customers know when payment is expected?

Geoff T · Dec 23, 2009

OP - if you go ahead with the update to your terms and conditions, I'd suggest referring to "Late Payment of Commercial Debt Regulations 2002", rather than "Late Payment of Commercial Debt (Interest) Act 1998"

That way you can charge a compensation charge on the overdue invoice as well as interest.

The "payontime" link above includes an interest calculator to work out what you can charge in interest too.

Geoff T · Dec 23, 2009

GRDCredit said:
As said before the payontime website is a good resource but at the risk of stating the obvious just by threatening to add interest to your invoices is not going to make people pay you quicker!

(Sorry - not with it this early!)

PS - Have to agree with this... if the money's not coming in like it should, would this not be a good time to review your current credit control policy/processes to see if you can improve them in some way to get the money flowing quicker (without running the risk of p*ssing off - and potentially losing - your customers, as GRD said already)?

Spongebob · Dec 23, 2009

When I started out in business 30 years ago it was pretty well universal practice to offer settlement discounts- say 2.5% for payment within 30 days.

Reading this thread I just realised that I have not seen a settlement discount offered for years.

Have they died out?

Tej · Dec 23, 2009

Spongebob said:
When I started out in business 30 years ago it was pretty well universal practice to offer settlement discounts- say 2.5% for payment within 30 days.

Reading this thread I just realised that I have not seen a settlement discount offered for years.

Have they died out?

Those were the good ole days... when companies paid on time and took their 2.5% discount. ( 3 and 3/4% for 7 days!!)... we used to offer 5% immediate payment

... and we had not even heard the word "factoring"

Now if you offer it.. they would take that discount and still pay after 90 days if you are lucky... LOL

Merry Christmas!

Williams lester · Dec 23, 2009

There are still companies that offer prompt payment settlement discounts...we often see them on invoices from our clients books. Depends what industry you are in probably.

Peter Bowen · Dec 23, 2009

I copied this off an article I wrote a while ago

5 reasons why charging interest doesn't work
It's tempting to whack interest onto every outstanding invoice hoping that the debtor will pay before it mounts up. I think it's a waste of time.

1. Interest does nothing for cash flow.
The possibility that you might be able to collect interest in the future will not solve cash flow problems today.

2. It's not a big enough stick.
The law in your area probably limits the amount of interest you can charge on late payments. It's likely to be a tiny amount for just a few months. Clients know that if they pay you the original amount you're very unlikely to come chasing for the little bit of interest that has accumulated over a few months.

3. Charging interest legitimizes paying late.
Charging interest sometimes has the opposite effect. It legitimizes late payment. It's seen as a fair exchange for delaying payment.

4. You can't set the interest rate based on the risk.
A bank charges dodgy clients more interest than it charges solid ones. You can't. The maximum rate you can charge is usually set by the government - who have very little idea of the actual cost of you not getting paid.

5. You're not a bank
Banks stay in business charging interest because they can lend far more money than they actually have in deposits. Us small business owners can only allow our clients as much credit as we can support by stretching our suppliers, maxing our credit cards, overheating the overdraft and raiding the kid's piggy banks.

GRDCredit · Dec 23, 2009

Peter - just to say, great article.

matt.chatterley · Dec 23, 2009

Spongebob said:
When I started out in business 30 years ago it was pretty well universal practice to offer settlement discounts- say 2.5% for payment within 30 days.

Reading this thread I just realised that I have not seen a settlement discount offered for years.

Have they died out?

We used to offer 5% off for very prompt payment. We've stopped this now, however, as very few clients actually took us up on the offer. Some even tried to use the discount despite the fact that they were paying outside of our normal terms!

Also you have to consider - if a client isn't going to pay, or is going to cost you an extraordinary amount of time/work/effort in extracting payment - do you still really want them as a client?

I don't mean this in a callous "bah, we have plenty of work" fashion, but rather, if you are spending several hours chasing up a £100 invoice (on which lets assume your gross profit is 50%), have you still made money from the sale?

Williams lester · Dec 23, 2009

Peter Bowen said:
I copied this off an article I wrote a while ago

5 reasons why charging interest doesnt work
Its tempting to whack interest onto every outstanding invoice hoping that the debtor will pay before it mounts up. I think its a waste of time.

1. Interest does nothing for cash flow.
The possibility that you might be able to collect interest in the future will not solve cash flow problems today.

2. Its not a big enough stick.
The law in your area probably limits the amount of interest you can charge on late payments. Its likely to be a tiny amount for just a few months. Clients know that if they pay you the original amount youre very unlikely to come chasing for the little bit of interest that has accumulated over a few months.

3. Charging interest legitimizes paying late.
Charging interest sometimes has the opposite effect. It legitimizes late payment. Its seen as a fair exchange for delaying payment.

4. You cant set the interest rate based on the risk.
A bank charges dodgy clients more interest than it charges solid ones. You cant. The maximum rate you can charge is usually set by the government - who have very little idea of the actual cost of you not getting paid.

5. Youre not a bank
Banks stay in business charging interest because they can lend far more money than they actually have in deposits. Us small business owners can only allow our clients as much credit as we can support by stretching our suppliers, maxing our credit cards, overheating the overdraft and raiding the kids piggy banks.

Any chance of a link to the whole article please Peter?

Peter Bowen · Dec 23, 2009

Here is the link to the whole article http://www.getting-paid-system.com/...g-interest-on-late-payments-does-not-work.php

eDEMAND · Jan 4, 2010

You'll find a Late Payment Calculator and the necessary legal wording on eDEMAND. The website should be on my details?! I'm new hear so just finding my way around.

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Interest on overdue accounts - how do you do it?

Postforce

matt.chatterley

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seanstevens

matt.chatterley

GRDCredit

Geoff T

Geoff T

Spongebob

Tej

Williams lester

Peter Bowen

GRDCredit

matt.chatterley

Williams lester

Peter Bowen

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