Charging Interest on overdues. Do you use it?

Forums International Managing Director Laurie Beagle conducts a Credit Forums Q&A

The Forums run by Forums International are widely recognised in the industry as great value with our members attaining a great deal of professional development by attending. Forums International Managing Director Laurie Beagle asks question to Forums International members ‘Charging Interest on overdues. Do you use it?’ There were some very interesting replies.

Charging Interest on overdues. Do you use it?

Here are the replies…

“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 3rd party collection agency only then would we add these costs.”

“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.”

“We have the late payment directive in our T&C’s but rarely apply interest unless we have to issue legal action to recover a debt. Whilst it would be lovely to earn interest on overdues across the board it would be a nightmare to administer, it would probably lead to more negative debates with customers. 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 etc., it gives us something to barter with if the customer concerned finally comes to the table to communicate with us.”

“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 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 % of the discount they were entitled to dependent on how late they pay. It’s a complicated calculation. In our future SAP ERP world our intension is to charge interest as part of the dunning process.”

“Despite me championing it,my company was always reluctant to add late payment fees & 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/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, but we have had some debtors settle their balance AND the fee, so it’s probably a case of ‘so far, so good…’!”

In summary, everybody seems to have the facility when charging interest. However, it is used as a threat or last resort and could just end up as another unpaid debt on the ledger. When you take into account the cost of raising the interest charge and then the likelihood of it being paid (and if it’s not writing off the charge which is generally small). Then is it cost effective?

Thanks to all the Forum members for their very valued response to this question.


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