What are the issues with charging a penalty fee or interest on late payments?

Improving payments terms is undoubtedly a beneficial move for businesses in the current economic climate.

However before you go ahead and implement a late payment penalty, it is important to ensure that your accounts receivable process is as efficient and effective as it could be. An effective accounts receivable process is characterised by:
• The establishment of clear credit terms at the outset of a relationship.
• Prompt issuance of invoices.
• Tracking of accounts receivable to identify slow-paying customers.
• Regular communication with customers to identify and resolve problems before invoices become overdue.
• Action taken against a debtor if they are persistently delinquent.

If your accounts receivable process is working as it should be, and you wish to pursue the late payments penalty, there are a few things you need to consider:
• Do your terms and conditions adhere with any regulation/legislation that applies to your business/industry?
• How will you communicate your new terms to your existing customers?
• This move may result in customer backlash – are you prepared to lose customers? When considering this you must remember that a persistently delinquent payer is a significant drain on internal resources – some customers are not worth having!

A late payment fee is not guaranteed to improve payment behaviour, however if it does, it will undoubtedly have a positive impact on your cashflow.

Christine Christian was appointed CEO of D&B Australia and New Zealand in 2001 after leading the management buy-out of these operations from D&B global company. In this role, Christine has more than doubled the market value of D&B. In 2007 Christine managed the competitive sale process of D&B Australasia from AMP Capital to Lazard Carnegie Wylie.

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