The Analysis Forums
Penalty interest on overdues
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Laurie Beagle Managing director, Forums International
lauriebeagle@forumsinternational.co.uk
A long-time member, Robert Hutson, global business consultant, HP Inc. Credit & Collections, recently suggested a topic. That is the charging of interest on overdues in the commercial-credit environment. Most firms include the right to charge interest at a stated rate in the event of payments not being received in accordance with the contractual payment terms, but many, I am sure, do not invoke that right apart from when adding to a legal claim or in, bankruptcy claim. The question we asked our members was: ‘In the commercial trade-credit environment, when dealing on an open account, many companies include a clause in their contracts giving them the right to charge interest if payments are not received in accordance with the contractual payment terms. However, few companies seem to add those charges to customer account balances as a matter of course, choosing only to add them in the case of a legal or bankruptcy claim. What is your experience?’ There were some interesting replies: l ‘Our terms and conditions contain the clause to charge interest; however this is not something that we enforce mainly due to the benefits not exceeding the work that it would involve. If legal proceedings are issued or a third-party collection agency is used, then would we add these costs.’ This was a common reply from the members. l ‘In my experience, interest charges are useful but quite difficult to collect. I prefer to use them as a carrot to obtain payment of the principal debt, normally issuing a manual invoice stating this is the interest and how much it will increase until the debt is paid. The conversation then is “if you pay this today, I will write the interest charges off”. Using this approach is 70% effective in obtaining the funds or getting a customer to discuss why they cannot pay and working with them on a plan, the rest will end up legal action or insolvency.’ l ‘We tend to keep it on hand for the more serious cases so that it shows a clear escalation route to the customer instead of going straight in with interest. In my view, it demonstrates our willingness to be reasonable by going above and beyond to avoid adding charges until the situation has become intolerable. Then of course, if we do issue interest, it gives us something to barter with if the customer concerned finally comes to the table to communicate with us.’ l ‘We do charge interest on overdue in one of our companies. This is often on legal cases or if we have to implement payment plans. This
May 2019
is mostly since there is no system to support this, so we have to calculate it all manually. If it is charged or threatened, we utilise it as a negotiation tool to encourage payment or to ensure we get the full debt paid and only lose out on the interest element. As a precaution, we also only recognise the interest as income once it has been paid in full. We also have a discount clawback scheme that auto-charges the customer a percentage of the discount they were entitled to dependent on how late they pay. It is a complicated calculation.’ l ‘Despite me championing it, my company was always reluctant to add late payment fees and interest – unless pursuing the debt legally. The introduction of credit insurance in late 2016 changed this view slightly, as the
first thing our insurers do when taking on collection of a debt is to add fees or interest. The success of this has prompted us to start charging late payment fees (not interest yet – one step at a time!) as part of the chase process: we include it when formally warning the debtor of possible referral to credit insurers, not at the (earlier) dunning 1 or 2 stage. The new process is very much in its infancy.’ In summary, everybody seems to have the facility to charge interest.
It is used as a threat or last resort and could just end up as another unpaid debt on the ledger.
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