How to Charge Interest on a Small Business Debt
Posted: August 01, 2010
Late payments are a difficult issue for any small business/independent contractors/freelancers. A standard interest charge on amounts due from customers can act as an incentive for the customer to pay more promptly; in the absence of an interest charge, there is little penalty for customer to delay paying, as your business is essentially offering an interest-free loan out of your cash flow for the duration of their late payment. Determine how much and when to charge interest.
From: ehow.com
By Ellis Davidson, eHow Contributing Writer
[caption id="attachment_7524" align="alignleft"]
© Scott Maxwell - Fotolia.com[/caption]Late payments are a difficult issue for any small business. A standard interest charge on amounts due from customers can act as an incentive for the customer to pay more promptly; in the absence of an interest charge, there is little penalty for customer to delay paying, as your business is essentially offering an interest-free loan out of your cash flow for the duration of their late payment.
Instructions
Step 1
Determine the standard terms for the interest to charge on late payment in your industry. This is typically 1.5 percent per month (which compounds to 19.6 percent per year), or 2 percent per month (which compounds to 26.8 percent per year), after a grace period of 30 days after the customer's receipt of the invoice.
Step 2
State your debt terms up front when negotiating with a new client. Interest on late payment is primarily charged in order to speed up payment, so this must be brought to the attention of the client as a key term in contractual negotiations. In most cases, interest on late payments cannot be imposed after the fact if this is not part of the contract terms; check with an attorney to see if standard debt terms are allowed in your locality.
Step 3
Calculate the interest charge on the past debt by multiplying the amount past due by the monthly interest rate. For example, if a customer owes $1,000 and is more than 30 days past due, and your interest rate is 1.5 percent per month, the interest charge is $15.
Step 4
Itemize the interest charge separately on the new invoice, along with any new charges. For example:
Amount past due: $1,000
Interest charges: $15
New items this invoice: $500
Total due: $1,515
If this customer does not pay for another 30 days, the next interest charge would be 1.5 percent X $1,515, or $22.73.
Read more: How to Charge Interest on a Small Business Debt | eHow.com
http://www.ehow.com/how_5966613_charge-interest-small-business-debt.html#ixzz0vNHjYCRw
Also learn about usury laws -- laws which limit the amount of interest which can be charged on loans. http://www.wisegeek.com/what-are-usury-laws.htm