It's no secret that overdue or unpaid invoices can create more than frustration. They can create cash flow inconsistencies and threaten business sustainability as well as client relationships. As an incentive to ensure that invoices are paid on time, some businesses are inclined to take such measures as charging interest on these overdue invoices.
The practical reasoning behind such a decision makes sense, but while many Australian business owners understand the simplicity of such a move, they question the legality of it. So, is it legal to charge interest on overdue invoices in Australia?
The short answer is yes, you are legally able to charge interest on overdue or unpaid invoices. But not so fast, as it isn't quite as cut and dry as that. There are some considerations you need to keep in mind before you start sending out the additional charges.
Requirements and restrictions
As a business owner, the right is yours to charge the additional interest, but not without meeting the requirements of the process. While you need the bit of extra motivation to ensure your clients or customers make their payments on time, there are also requirements in place to protect them as well. Otherwise, fees could get out of hand quickly.
Here are some of the considerations you need to keep in mind when applying interest to your late invoices.
- Be upfront about it: If you are planning on charging overdue interest, you need to have the amount written out in the Terms and Conditions section of the contract you have with the client or customer. Essentially, the amount of interest needs to be agreed upon by both parties before the goods or services are provided. Tacking additional interest on after the fact would be outside of the agreed upon terms, and therefore not a legally supported move.
- Clearly state the condition: While it seems like an obvious notion, the implementation of additional interest needs to be clearly stated in the contract. This means you cannot be nondescript about it, but write out not only how much interest will be charged, but also the date it will go into effect.
- Make it fair and reasonable: This goes back to the point about having protections in place for the payor. The fee you establish needs to not only be agreed on at the signing of the contract, but also deemed fair and reasonable. If the rate of interest is too high, it is going to have the opposite effect and result in the client not wanting to pay. Even further, if it can be shown that the rate of interest is not fair and reasonable about the invoice amount, then a court will not uphold your right to those monies.
While "fair and reasonable" may seem like a broad provision, having a conversation with your client before signing the contract will go a long way. Additionally, it's worth noting that a general rule of thumb that most businesses adhere to is capping the interest at ten percent annually and having the option to break the interest down into a monthly charge. This type of behavior would go a long way in not only establishing the reasonable amount, but also the fairness at which it is to be paid back.
Treat the language as you would any other penalty
Additional interest on an overdue or unpaid invoice is a penalty to the client or customer for their tardiness. Therefore, you should make this as clear as you would any other penalty. Are there additional penalties that you have laid out? You likely have these clearly identified in the contract, so why treat interest or additional fees any differently?
Essentially, the bottom line is this: Make the wording regarding additional interest as clear as possible. Trying to tack on interest without the client's full awareness is the biggest problem that businesses run into when attempting to implement fees of this sort.
If a client were to challenge your interest charge and make a claim to the courts, then the courts are going to look at more than just the current contract in discussion, but the relationship as a whole. Therefore, your business needs to be consistent when it comes to sending out invoices.
Consistency leaves little room for a client to argue. For example, if your invoices come at the same time every month, then it would be difficult for a client to claim they were caught off guard by it this time around. On another note, this consistency will also help maintain regular cash flow on your end.
Keep communication open
When money is owed, it can be easy to let that frustration get the best of you. But before going straight to legal proceedings to acquire your money, get in touch with the client. Determining whether they have a valid reason for being late on their payment is a crucial first step. It's also one that won't cost you additional money.
If your conversation does not further your progress of recouping your money, then send a letter of demand. Remind them of the additional interest as well, as outlined in your initial contract. However, when sending this letter, it is crucial to remain professional and up front about the situation. The Australian Competition and Consumer Commission provides protections against harassing people about their debts. So, while there is nothing illegal about sending such a letter, keep your tone and respect in check so as not to cross any unintended boundaries.
Have strong partners on your side
It's not only about the intention, but also the execution. Make sure you are handling your interest and payments processes correctly and without risk by partnering with COFACE. We have global experience in helping businesses with their cashflow and operations, and we're well positioned to help assess and resolve payment arrears from your customers and offer personalised advice based on your specific market.
To find out more about how we can help you, contact us today for a free quote.