As a service provider, invoices can often be your lifeblood to cash. You perform your work or your services, and you provide your customer with an invoice, whether to obtain a partial payment or full payment for that work or those services. In fact, many of your customers will not make payment without an invoice. Nine times out of ten, without an invoice, you are not getting paid. So they are crucial to your business.
Because of the prevalence and popularity of invoices and the seeming “reflex” it generates to customers for payment, contractors and service providers have long adopted the practice of putting terms on invoices in addition to simply detailing the work or services furnished and the amount(s) due. Among them are interest and/or collections costs and legal fees that are due if invoices are not paid within a certain number of days. Vendors include a reference to “18% interest” or “18% financing charge” and think that if their customers do not timely pay the invoiced amount, they will also owe an 18% charge. This is not true.
While there may be a strategic reason to place interest or service fees or legal fee references on your invoices, doing so is legally insignificant. Under the law, in order to have a right to enforce a claim to a particular interest or service charge (or legal fees or “collections costs”), the customer must have contractually agreed to pay that interest rate or service charge. There must be a written contract or written evidence of an agreement in which the contractor and customer agree to interest or service fees or legal fees that will become due in the event of late or failed payment. Without that advance agreement, the contractor has no right to recover interest or service fees or legal fees (except for simple interest under the statutory rate, which in Ohio is currently only 3%).
So as a contractor, service provider or vendor, you need to ensure your quotation forms, purchase orders or contracts are (1) actually being used for every transaction and (2) include clear descriptions of the consequences you intend to enforce if your customer fails to pay amounts when due. Otherwise, those references to interest and legal fees that are due in the event of late payment is really nothing more than an empty threat.
This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.