Collecting Interest on Past Due Balances
Unpaid receivables cost your business money. Late paying customers may force you to resort to your business’ line of credit in order to satisfy your own cash flow obligations. You are, of course, paying interest on that line of credit.
If you expect to recoup interest from your customer, you need to make sure that an agreed, commercially reasonable interest rate is included as part of your purchase order, contract, or some written document that has been signed by the customer. If your customers are consumers as opposed to business entities, you have to make sure that the interest rate does not exceed the maximum permitted by the controlling state’s usury laws.
Absent a written agreement calling for interest, you will have difficulty recovering interest on the unpaid balance for any point in time prior to filing a lawsuit to collect the unpaid balance. In Michigan, if you do file suit and ultimately obtain a judgment for the amount owed, you will be able to include in your judgment statutory interest calculated from the date you filed the lawsuit. If your claim is based on a contract or written document, the interest will be computed based on any specific amount agreed to in the contract. If no amount was set forth in the contract, interest will be computed at 13% per year, compounded annually.
If there is no written agreement underlying your company’s claim, interest on any judgment you obtain will be limited to a variable amount, calculated at six month intervals, at a rate equal to 1% plus the average interest rate paid on five year United States Treasury Notes. As of January 5, 2010, that amount equals 3.48%. Obviously, a written agreement allows you to recover a much higher rate of interest.
In order to protect your ability to recover interest on unpaid balances, you should make sure that sales or services are provided pursuant to a written contract and that the contract specifically provides for the imposition of interest at a specified rate on any past due balance.
Dirk A. Beamer