Credit terms can vary widely from business to business and from customer to customer. Some business may prefer Net-30, while others prefer 3/7 EOM. Often times, you will have to treat certain customers differently depending on their size or financial situation. One of the other tools you have at your disposal is charging interest. This can be a great tool to encourage on-time payment and can help make up for the potential lost revenue from late payment. Here are some things you need to consider before adding any sort of interest rate for late payments.
1. Make Sure It is In Your Credit Agreement
Any interest that you wish to add on too late payments must be written in the signed credit agreement. You can not just decide that because your customer is 2 months late paying you are going to tack on an extra 10%. By having the interest payments in your credit agreement, you not only make them legally enforceable, but it also will be better for your relationship with your customers in the long run. No ones like to have fees and added payments come out of the blue. If you decide interest or fees are right for your business, we highly recommend being as upfront and transparent as possible.
2. Do not try to take advantage of your customers
If your customer is already having issues paying the original amount owed, charging them very high-interest rates or late fees really will not accomplish much. You do not want them to resent your company and think you are trying to take advantage of them at a time when they are most vulnerable. In some cases, you can even get into legal trouble for charging rates deemed too high by your state.
3. Potentially a Great Bargaining Chip
As we said above, if your customer is late paying you they are potentially at a vulnerable point. They most likely owe multiple companies and probably do not have the money to pay everyone right now. This can be a great time for you to build customer loyalty by offering to waive or reduce any sort of interest payment. You are really not losing any money because they would most likely not have been able to pay the interest to begin with. You also are providing a helping hand which can pay dividends down the line if they work their way out of this rough patch.
Interest payments have the potential to be a great tool in your credit process, but they should be done legally and with full transparency. Any potential gain you get from trying to sneak extra fees onto your customers will be lost due to high turnover and poor customer satisfaction.