Interest on overdue debtors

As the credit crunch bites, companies are finding it harder to get money out of their debtors and therefore taking longer to pay their suppliers. There are many methods of receiving cash for your debtors, either by offering an early settlement discount to your debtors and receive the money directly, or by factoring where you receive a loan based on the strength of your debtors and repay the loan when your debtor repays.

But what if you cannot afford to offer a cash discount? The opposite may similarly incentivise early payment – provision of interest on late payment. Under the Late Payments in Commercial Transactions (EU, 2002) you are entitled to charge interest on overdue business accounts. The interest rate charged can be anything up to 7% above the ECB rate (1.75% at 9/06/09). (ECB rate can be checked here). It is important to note that this is the maximum annual rate so the monthly interest charge at current ECB rates should be 8.75% x 1/12, or 0.729%.

When is an account late?

An account is late when it is outside the terms agreed at the date of sale, most commonly 30 days. If no terms were agreed and it is a repeat customer who regularly pays the invoice when received, then the invoice to overdue if not paid within this period. It is more difficult with new customers and therefore it is important that the terms of payment are stated on the invoice, or if it is a significant sale it should be included in the contract terms before any work is carried out.