Whenever your client fails to pay on time, as a business owner, you have prescribed measures to take. The initial steps usually involve reminding the customer of their obligation to pay. In the remainder, you’d spell out to them the consequences of failing to pay in line with the payment plan. But even with the reminders, some customers would ignore or request for more time. Depending on your mode of operation, you may agree to give them more time.
However, a time comes when the debt is long overdue, and the client doesn’t appear committed to paying anytime soon. This is why applying late fee interests is necessary to encourage clients to pay before the due date.
While this approach works in some cases, it becomes counterproductive in others. As soon as the client sees that the late payment interest has been applied, the drive to pay may be dampened.
Is It Legal to Charge Interest on Overdue Invoices?
Before resorting to debt recovery processes, charging of interest is usually the first step many businesses take. The question that lingers, however, is whether the practice is legal or not. If you’ve been asking that question, know that it’s perfectly legal, but the amount needs to be reasonable.
Charging a late payment interest, known as statutory interest, is your legal right. The law, however, stipulates the ceiling and the floor for the interest. That’s to say that you cannot just wake up and impose some unreasonable percentage as interest. At the same time, this interest must be communicated to the client at the time of delivering the service, so that they’re aware of the consequences of late payment before they make any commitments.
Things to Weigh Before Charging Interest
The main thing to consider when contemplating charging interest on outstanding debts is whether it will make your customer pay faster or worsen the situation. Even if the customer pays, could it damage your business relationship?
Different debt collection practices work differently on different customers. Costs involved also vary. Because following up on unpaid debt is usually too demanding, most businesses choose to outsource the services of a reputable debt collection agency Sydney. Working with an agency that understands your business policy is very easy. As soon as you’ve forwarded the business debt collection responsibility to them, it becomes their responsibility to reach out to the debtor and work out ways so that the debt is recovered.
If you choose to go the debt recovery agency way, you must make the right choice. The agency you choose to work with should have a good reputation. The cost of hiring the services of the agency should also be reasonable enough not to drive you into losses. Explain your terms very clearly to the agency to avoid any unnecessary harassment on the debtor, considering that you may consider doing business with the client in the future.
In case you also charged a late payment interest, this should be communicated well in advance to the client and the agency. This is to ensure that everything is clear to all the parties involved.