“Ask CashFlo” is a credit and collections advice column for small businesses. Questions may be submitted via email to flo@askcashflo.com. Follow CashFlo on Twitter @AskCashFlo. CashFlo reminds readers that she is not an attorney and nothing in this column should be construed as legal advice. As CashFlo always says, “When in doubt, consult your attorney”.
Dear CashFlo,
I am a licensed electrician and I have a growing small business. Most customers pay when I do the work, but sometimes it is just not possible. I don’t have customers sign a contract, but I put on all my invoices that I charge interest of 35% on all balances over 30 days. This is OK, right?
Wondering in Westport
Dear Wondering,
First of all, you’ve got CashFlo wondering if this is an April Fools’ joke post. And no, it is NOT OK! In fact, it is a “CashFlo No-No” in more ways than one.
First of all, have you ever heard the term usury? No? Well, if you charge 35% interest you will likely hear it soon, as it is against the law. Usury means charging an unreasonable or unfair interest rate. Here is the Wikipedia entry on usury. Get to know what rates are considered fair in your state. If you have insomnia, here is the law in your state (Connecticut) regarding usury.
Secondly, you must have a written agreement from your customer to charge them interest on past due balances. It is not enough to just put it on your invoice. That is a good reminder of what is in your contract, but nothing more. If you do not want to bother with a long contract, simply use a simple work order that shows the amount of interest you charge, and make sure you get it signed when you do the work.
Most states, including Connecticut have unfair trade practices act. Charging interest without a signed agreement just could be considered an unfair trade practice. Don’t risk it!
Yes, it is certainly unfair that you not get paid for work you do. So take the step of getting a contract first, and avoid trouble down the road.
Yours truly,
CashFlo
PS Would you like some more information about how to reduce bad debt in your business? Here you go!
