An Introduction on Interest for Overdue Invoice
How Much Interest Is Acceptable For An Overdue Invoice? Late Fees Explained
For an overdue invoice, there’s no applicable interest rate. After the payment date is overdue, the late fee is decided willingly by the vendor. You must inform the customer of an extra fee beforehand so there won’t be conflict. Both parties should have agreed upon a fee after the payment is due.
This aspect of the chapter will cover:
- Late Fee
- Standard Late Fee on an Invoice
- When to Charge a Late Fee
- Is it Legal to Place Interest on An Overdue Invoice
Late fee is the extra charge a vendor adds to an overdue invoice. Later fee payment is included when the payment terms on an invoice of the vendor have not been fulfilled.
Payment terms are the duration specified by the vendor for the customer to pay an invoice. Commonly, you’ll find terms like “net 30 days”, “net 90 days”, ” payable upon receipt.”
For most businesses, “net 30 days” is very common, because of the cash flow. You’ll find payment terms and the fee charges on almost every invoice.
Standard Late Fee on an Invoice
There’s no regulated standard late fee for any business. Late fees can be charged every at a flat rate or a monthly percentage of the total amount.
For small business owners, there’s a need to weigh up the cost of future business when charging late fees. As the business owner, following up on overdue invoices should be a key part of you, when some customers fail to make the payment, you’re to be patient with them to avoid destroying customer relations.
When to Charge a Late Fee
A vendor will start charging for a late fee as soon as the customer’s invoice is overdue. For example, if the payment term on the invoice is 30 days, the vendor will start adding extra charges after the 30 days have elapsed. As a vendor, you are advised to exercise little patience after some days when the payment is overdue, based on the relationship with the customer.
Also, you should consider how often the customer pays and the number of unpaid invoices you have outside.
Exercising patience for a few days is important because the customer may be on the verge of making their payments. If you have to add extra charges at the time, you may be regarded as an unprofessional business owner to the customer.
Note that the customer may have it in mind to pay on time, but for unexpected emergencies, they delay the payment. By being patient a bit, the customer will look for means to pay you on time.
When you add extra charges, the payment may not be worth the stress you have undergone.
Annie’s Pastries in San Diego, California, delivers pastries five days a week to Mark’s investors, a company about 10 minutes’ walk from her store. Every week the price of pastries she delivers is about $200.
Annie submits an invoice of $800 at month-end, and her payment terms in the invoice, states that payment is due after 30 days of receiving the invoice.
After 30 days, Annie doesn’t check on Mark’s investors, and her policy is to bill an unpaid invoice an 8% monthly fee, of which her policy is to avoid late payments from customers. For every 30 days that the invoice is delayed, there’s an additional $64 on the actual payment, which is $2.13 every day.
The challenge here is when Annie should start asking Mark’s investors for her invoice payment. She’s a busy person with a small enterprise, and the $800 may likely affect her cash flow. The $2.13 additional fee, if collected, won’t add anything to her business.
The best thing for Annie is to make a call almost every day after her payment is overdue to her debtor, Mark. She calls Mark to find out that he’s been sick and bedridden for about a week, just around the time she sent the invoice. He was then flown overseas for business meetings for up to 2 weeks; for this reason, her invoice has been delayed.
Later, Mark promised to pay her invoice; he calls her later in the day to inform her that he’s working on it and sends the check later under 48 hours.
Assuming she didn’t receive such a reception from Mark, maybe she couldn’t place a call directly to him, and she sends him a polite message reminding him of the late payment. She informs him of sending the invoice again to his Email, which she later did.
No action was taken by Mark for more than a week, and she didn’t receive her payment. Annie, at this point, has tried her best to convince Mark to pay, and are the end of 30 days, she activates the 8% monthly interest and submits the invoice again.
Is it Legal to Charge Interest on Overdue Invoices?
Yes, it is legal for a vendor to charge interest on unpaid invoices. A vendor has the right to do so after the customer fails to honor their payment policy. The main question is whether the customer is mandated to pay the interest.
Before a vendor charge interest on unpaid interest, both he and the customer has to agree with his payment terms. A customer is right not to pay the extra charge only if they didn’t agree with the vendor before the start of work. With an agreement, both parties will know what they are expecting after payment is overdue.
Looking into Annie’s case, when Mark first contacted her, and she gives him a form to fill in the form of an agreement, the form will receive Mark’s signature. If Annie had stayed her interest terms clearly in the form, Mark would have read and agreed to the terms before signing the form.
The payment terms and policy is always in bold fonts and at the bottom of the order form.
If Mark signs and sends back the form to Annie, that means he is convenient and comfortable with her policy. She has a strong case and can take legal actions against Mark if he fails to add interest.
At times, the customer chooses to pay the late fee so that he and the vendor can continue doing business. If Mark finally realizes that he’s to pay an extra charge because of late payment, and there’s another invoice in line for another month of pastry supplies. He can challenge the payment of an extra fee because he feels Annie will want to keep doing business with him.
He chooses to pay the extra charge and continue doing business with Annie because her service is top-notch and fast. From a legal view, he’s supposed to pay any extra charge because he has agreed to the terms before signing the order form.