Your customer fails to make payment. If payment is not made within 30 days your invoice states that you have the right to more than just the contracted price. You carefully included additional terms on your invoice. These terms stood out in bold type. Your invoice stated that you would add 1 1/2% interest per month. You also stated the customer will pay collection costs, attorney fees and finance charges.
Now you seek to enforce your rights to payment. But you discover that you cannot collect the interest and extra charges even though your invoices clearly state that you are entitled. The customer accepted the invoice and raised no objections. Didn’t the customer then agree to all the terms on the invoice?
The Law on Collecting Interest and Fees
If you sue to collect, you may collect interest. However, absent a signed writing by the customer, you are entitled to collect interest as determined by the State. Each state determines how much you can collect. New York allows 9% interest per annum, which is better than bank rates, while New Jersey limits interest to .5% per annum.
Often you will see a clause on an invoice charging the customer 1 1/2% interest on an invoice or 18% per annum. This exceeds the state interest allowed and therefore requires something signed by the client to be enforceable.
You must include additional fees in a document signed by the customer. Attorney fees, court costs and additional interest are charges to include or reference in the original agreement. Therefore, you cannot simply add something to your invoice that was not previously agreed to and expect to recover.
Terms included on your invoice are not enforceable unless:
- your customer signed the invoice thereby agreeing to the additional terms or
- the terms contained on your invoice were part of the original agreement or
- the invoice refers to terms and conditions that were part of the original contract or referenced to in the original contract
You must make sure that your customer agrees to these terms if you want to recover the interest at 1 ½% per month plus the attorney fees. You do so by either including them in your underlying terms and conditions or in writing, which the customer must sign. This indicates their agreement to the terms.
What You Can Do to Improve Future Outcomes
There are steps you need to take to protect yourself and have the best chance to recover monies for the additional terms on your invoice. First, make sure to include the interest rate and your right to compensation for collection costs in your contract. Include them in your terms and conditions. And include them in your credit application at the onset of the relationship. This should remove any doubt that the customer is responsible for the interest and extra charges.
These documents are the cornerstone of your company’s financial health. With a new year around the corner, now is a good time to review documents used with your customers. These include your contract, terms and conditions, credit applications and other documentation. We are available to review these and can provide assistance drafting or editing these critical documents. Get in touch with us and let’s get your documents ready to withstand the challenge and improve your chances of collecting interest and collection costs should a customer not pay their what is due.