Charging interest over overdue invoices: how to implement?
Charging interest on overdue invoices can help you make more money. It also helps create a sense of urgency for your customers to pay up. There are many factors that play into interest rates and how much interest to charge on overdue invoices, but the most important thing is knowing what each country’s interest rates are and when you should be charging interest. This blog post will cover all these topics in depth, so read on!
Found out about interest rates, when it’s appropriate to charge interest on overdue invoices and how interest is calculated, right here.
Interest rates in different countries (the UK, USA and Canada)
Interest rates vary from country-to-country, so you’ll want to know what your interest rate should be for each type of customer. You can also use automation software that automates interest charges by calculating the due date to current date and interest rate, and sends out interest charges on your behalf.
- Interest rates in the United Kingdom are currently 8% plus the Bank of England rate for late-paying clients, including businesses and public sector customers (Source: https://www.gov.uk/).
- In the USA, businesses can charge $15 per month of unpaid invoices if they’ve been contacted in the past 30 days, or $25 per month if they haven’t contacted their customer within the last 60-90 days (Source: Entrepreneur).
- In Canada, interest rates for overdue invoices are determined by the province. The interest rate in British Columbia is currently set at 12% (Source: BC Ministry of Finance).
Charging interest on your customers' late payments can help you make more money and give them a sense of urgency to pay up. There are many factors that go into deciding how much interest to charge and when it’s appropriate to charge interest, but knowing what each country’s interest rates are and when they’re applicable will ensure you don’t overcharge or undercharge anyone.
When can I charge interest on overdue invoices?
If there are general terms and conditions applicable, these normally include a topic on interest rates on overdue invoices. They are valid in the business to business and to public sector customers. Especially if it applies to consumer transactions, the law will look at reasonable rates. You can charge interest on an unpaid invoice but only when there is a contract or agreement in place that allows for it. Otherwise, there is no legal obligation for the customers to pay the interest. In addition, it may harm your customer relationship and future opportunities.
How much interest can I charge?
Government stated interest rates vary from country-to-country, so look up the interest rate based on which type of customer you’re dealing with. You can also use automation software to make interest charges by calculating the due date and interest rate, so it’s important to keep up with current interest rates as they change often. In the UK and within the European Union, the interest rates change between the first of January and on the first of July.
So, let’s imagine you are in Canada and you’ve chosen to set a monthly interest rate of 1%. 12%/12 = 1%. If your customer is 30 days late on a $50,000 invoice, he or she now has to pay you $50,000 * 1% = $500 extra. If he or she still hasn’t paid after another 30 days, he or she owes a further $500, and so on until they pay.
Where did a transaction take place? This is not always clear. For example, if a customer buys an article online from a German vendor, but the website was British, the client believes he bought it in the UK. In most cases, laws are applicable to the country of residence of the buyer.
Now you know how to find out which interest rate is applicable, and what the rate is. Let’s look at a couple of examples for implementation. Not in all countries there is a clear due date. It must be determined from which moment to calculate the charge. If nothing is stated about a due date, each country has specific rules on time frames for overdue payments - usually 30 days from the day of invoice issuance should suffice.
How to charge interest on overdue invoices
Let’s implement interest rate into your accounts receivable process. Most of the time, the amount of money involved in bringing up interest on reminder letters is not very high. It will not make you rich. But it is an essential part of the relationship with your customer. It makes it obvious that there are costs for financing.
The first step in calculating interest over an overdue amount is to determine how many days past due the payment is. If you receive your payment 15 days late, you can only charge for those 15 days. Start counting the day after the payment is due and stop on the date you receive the payment.
To calculate the amount on a reminder is somewhat time-consuming. This is why it is often forgotten or simply not implemented. For that reason, we believe strongly in automation on this subject. Also, if you do not use interest rate consistently, it will miss its effect on your customers.
Some bookkeeping software companies offer this functionality in their software. Otherwise, there are accounts receivable software companies like Payt you could connect to bookkeeping software. It will save you time and money once you have implemented this process.
Hope this article was helpful to you. If you have any questions, please contact us. We will try to help you out on this subject.
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