Anyone who has ever borrowed money from a financial institution would be accustomed to paying interest. It is a tool that any company may implement as part of a broader collection management policy. Is it a tool that will work for you and if so, how do you add it to your credit management policy? Today we are going to look at interest and answer these questions.
Interest is an amount of money a lender or creditor charges on overdue accounts and is is why most people tend to associate it with banks and other financial institutions. Any company may charge interest on goods and services purchased on credit by their customers. Many companies will charge a small amount of interest; usually 12-24% per annum, on overdue invoices as part of their general credit management policy. The amount of interest added on to an overdue account can vary, depending on the amount owed and the rate of interest being charged. It is usually enough to spur most customers to pay on time. If they don’t it allows for some repercussions and at the very least interest charges may help cover some of the cost of collecting the overdue invoice if you need to hire a collection agency to handle the account on your behalf.
Making the decision to charge interest on overdue accounts is a good first step, but how do you make a policy that works for you? It is as simple as deciding how much interest you want to charge and informing your customers. This can be accomplished by setting out your interest rate in your credit application and then making sure your accounting software is set up to automatically charge interest on your accounts on a monthly basis. If you have not charged interest in the past you may also want to alert your customers that the terms of your credit policy have changed, and interest will be charged on all overdue accounts.
It is important to have a notation on your customer’s invoice stating that all overdue accounts will be subject to interest and include the rate which you will use. (i.e., 24% per year if you want to charge 2% per month) The hope is that your customer will pay their account quickly in order to avoid the interest charges. Alternatively, the interest amount can be used as a negotiation tool should you need to attempt to settle with your customer. The bottom line is it is highly recommended to charge interest on your accounts as it can be a very effective collection tool.