Finance Charges: How to Handle Your Charge Accounts
When customers don't pay their invoices, it can create a cash flow issue for your business. But beyond that, it can keep you from growing your business with the money that is owed. For this reason, some companies add a finance charge or late fee to overdue accounts. Often, the use of finance charges can spur late-paying customers to pay their accounts on time, improving your company's bottom line.
But how do you implement those charges and what should they cover?
Here are some ideas to help get you started.
Early Payment Discounts: If you have issues with a number of customers who habitually pay late, consider adding a discount for early payment, such as within 10 days of the invoice date. The discount may encourage them to pay early instead of having to wait months for a payment to finally come through.
Bad Check Fees: It takes time to contact the customer who wrote the check, your bank may charge fees for it and in the meantime, the invoice is still unpaid. Make sure that your bad check fee covers your time, bank fees and cash flow issues that are caused by receiving a bad check to discourage the practice.
Late Fees: A late fee is the opposite of an early payment discount - it's a simple-fee penalty to discourage delayed payers. Make sure it will cover the cost of the delayed payment. It can work well if you regularly have issues with smaller invoices where a finance charge would be very low and may not provide enough enticement to pay on time.
Finance Charges: This offsets the cost of collecting the debt, but the maximum finance charge depends on your state, and should be determined at the time that the client opens a charge account if you offer revolving credit.
By using finance charges as a tool to improve payment, you'll be able to lower your cash-flow issues and invest back in your business for better overall outcomes. If you're not sure how to set them up for your accounting system or want additional advice on what you should charge, AccountRely is here to help. Please feel free to contact our experienced financial professionals today for more details and see what a difference the personal touch can make to your company's finances.