Late Charges

When goods are purchased on credit, the supplier finances the purchase during the credit term. The extension of credit is regarded by many companies as a necessary cost of business.  Unless the bill is promptly collected at maturity, the cost for carrying the accounts receivable continues to increase.  When invoices are paid late, the cost to the seller is higher than anticipated, and is an unexpected and undesirable additional cost of business.

Interest can be charged on borrowed money.  Late charges for payment services on overdue accounts receivable are a way in which the seller can recover the carrying cost of past due accounts recivable. Late charges should be clearly distinguished from interest payments, which are changes made by financial institutions for loans.  Many sellers/suppliers do not impose late charges for a number of reasons, such as:

• The fear of losing customer goodwill;
• Doubts about their ability to collect these charges cost effectively;
• Concern that sales will be lost if such charges are applied, especially if their competitors do not use them; and
• A belief that the costs of carrying overdue accounts are comparatively small, so it is easier to absorb them given the fact that interest rates at present are low.

Other creditor companies favor service charges for such reasons as payment made beyond invoice terms uses the supplier's capital without consent, and not charging for the use of this capital provides the customer with an unfair advantage over competitors that pay promptly. This may also be construed as a price concession on the purchase of merchandise, determined solely by the slow payer. Also, many sellers do not consider the costs of carrying overdue accounts receivable to be confined to the cost of money but are increased by added collection expenses and more likely bad-debt losses.

Corporate attorneys emphasize that late charge programs should be applied uniformly to all like customers or to like groups of customers, or they may be interpreted as a form of price discrimination. Each corporation must seek legal counsel before instituting a service charge program to make sure it is lawful. The main concern centers around treating all like customers fairly In other words, the issue is not the validity of using late charges but how to implement them. Further, under some state laws, late charges can constitute a violation of the usury laws if the amount is in excess of the maximum permitted by state law.

Edited by Michael C. Dennis, author of "1001 Collection Tools and Tips."