If you have customers that perpetually miss the payment deadline you might be wondering if you should include finance charges on your customer invoices. Many business owners opt out of this policy due to fear that a customer might become angry and refuse to do business in the future. However, the reality is that customers who neglect to pay their bills on time aren’t the type of customer you should want to do business with.
Another reason some business owners opt out of charging interest is the fear they won’t know how to account for the interest they’ve collected on their financial statements.
Adding a finance charge to unpaid invoices is a critical business practice for a lot of reasons. Here are five reasons you should include finance charges on your customer invoices:
- An Interest Charge Shows A Penalty For Delaying Payment
Including a finance charge on your invoice will show your customer that delaying payment has a real cost to them. This will be especially important if your customer has a stack of other unpaid bills that also include interest charges. If you don’t charge interest your customer will see no benefit to paying you immediately or waiting until a later date.
- Your Customer Won’t Like To See Their Bill Increase
No one likes to see a bill get bigger each month due to nonpayment. This practice is very effective on smaller invoices where finance charges can make the larger amount owed even more frustrating. Plus all customers have to account for the finance charges paid on their end, which no one likes to have to do.
- Charging Interest Will Save You Time
Collecting unpaid invoices costs all business owners a lot of time and money. These unpaid bills require phone calls and extra postage and staff time. For instance, if your employees spend 25 hours per week collecting accounts receivable, that reduces your profit potential by 25 hours each week.
- Interest Can Be Used For Compromise Later
If your customer pays their bill in full you can drop the finance charge in exchange for the payment. This is a concession that can help smooth out the customer relationship while making it clear that delayed payment is unacceptable.
- Finance Charges Can Be Profitable
Adding a 2% interest charge can lead to a larger profit for your business. For instance, if your business does $100,000 a month in sales and 20% of your customers pay at 45 days or later, you could collect an additional $4,800 each year in finance charges.
How To Start Implementing Interest Charges
Before you start including finance charges on your customers unpaid invoices you will need to establish a billing agreement that clearly states the terms of how interest will be applied. This agreement will need to lay out when finance charges will begin and how frequently they will be added to the balance.
Use clear language on your billing statement to help limit confusion later when finance charges begin to appear on your customer’s invoices. All invoices issued will need to include the principal balance, the interest rate and how much interest has been accrued.
It is also important to make sure your accounting software can add finance charges automatically so it doesn’t lead to extra work for your employees. QuickBooks is capable of adding interest charges to all or selected customers.
A final note is that while your customers who delay payment can become a big focus of your time, the majority of your customers do want to deliver payment on time. With that in mind, being polite and using clear language can help you get payment more quickly.