Can Small Businesses Charge Interest on Late Payments?

Date: March 16, 2018

Related Content: Legal - Compliance Legal

Small business owners enter contracts all the time. More often than not, these are executed without a hitch. That’s important because contracts are vital for business, and the national economy. But, one of the recurring questions we get from small business owners is: What can I do when my customer is late in paying their bill?

The first and best step is to include special terms within the initial contract. For example, many companies will include clauses requiring payment of interest on overdue bills. Such provisions are intended to protect businesses because otherwise they are stuck effectively
giving out interest free loans in the form of accounts receivables. Setting specific fees or interest rates for past due balances within these clauses will help insure that businesses can recoup losses from late payments. However, many states impose limits to the level of fees and interest rates that can be charged.

If the initial contract does not include a provision for collecting interest on past due balances, many states have a predetermined interest rate that may be charged. This amount is different from state to state, and can even be different from industry to industry or if the contract is with a government agency.

On a practical side, if there is no predetermined contractual rate for interest or late fees, there is nothing wrong with contacting a past due client and asking them to either pay immediately or to agree to a repayment plan with interest. In any event, it is advisable to consult an attorney about any applicable local, state, or business specific limits that can be charged. An attorney can also help ensure that your contracts are as air tight as possible by suggesting other provisions that may encourage prompt payment—such as provisions requiring a non-paying customer to cover any legal expenses incurred in pursuing debt collection.

For more insights, check-out our two-part guidance on contract negotiations here and here. And finally, check-out this NFIB webinar on debt collections. It may save you a lot of trouble down the road.

Related Content: Legal - Compliance | Legal

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