Most of the time, a business operation encounters overdue or unpaid accounts when customers fail to pay on time. While some companies do not impose interest on unsettled accounts, others do add a provision that in case the invoice goes overdue, interest is charged which is usually a percentage of the amount owed.
While charging interest on unpaid accounts can be an attractive option to get your customers to pay on time, and add to your revenues as well, there are some issues that you need to be aware of so that this will practice will not result in an additional burden on your part in the long run:
- Have you informed your customer that you will add interest to overdue invoice? Before a transaction is made and invoice issued, the customer needs to know that in the event he fails to pay on time, he will have to shoulder interest in addition to the total amount owed. You must include the penalty (or interest) as a provision in the invoice to make it clear.
- Is the interest rate based on legislation? Some states have specific provisions on debt payments and it’s best to know the prevailing interest rate that you can impose on the unpaid account and the maximum interest you can charge.
- Will you waive interest upon request? This is an issue that must be clarified and that your staff must know when they deal with the customer. There are instances when customers would request that the interest on overdue account be waived when they pay their invoice in full. You must have a policy in place to handle this.