Late payment: how to calculate and invoice it?

Summary:

1. What is late payment?
   1. The definition of late payment:
   2. The time limit for payment of an invoice :
2. How to calculate late penalties?
   1. Legal requirements for using late payment penalties:
   2. Calculation of the rate of late payment penalties and lump sum compensation :
3. How to prevent late payment?

 

The late payment is often a source of tension. For thecreditor company firstly, since it suffers from an imbalance of its cash flow. It also sees its DSO increase.

This imbalance can have a cascading effect on all production lines.

For theclient company also, because this delay degrades both its reputation as well as its commercial relationship.

This complicated situation requires quick solutions to recover this debt.

The law provides for measures to help companies to fight against bad payers. The late payment penalties is one of these devices. But there are also less confrontational arrangements such as the
amicable collection
.

 

What is late payment?

The definition of late payment:

Late payment is the situation where a company fails to pay an invoice on time – after the due date stipulated in the terms of a contract or agreement with the creditor.

The retardy of payment can have financial and financial and legal consequences for the company in question. In particular, if the company fails to repay the debt within a reasonable time.

Late payment involves customer risk management.

 

The time limit for payment of an invoice :

There are different payment terms:

• The cash payment. The debtor pays the entire of the amount of the invoice upon delivery or completion of a service.
• The payment after receipt. The debtor agrees to pay the invoice within 7 days.
• The default payment. The debtor has 30 days to pay the bill. This method of payment prevails in the case of no mention.
• The payment with a particular delay. The debtor company has 45 or even 60 days to pay the invoice amount.

Once the payment date has passedand in the case of an invoice contracted between two professionals, late late payment penalties may apply.

The late payment penalties come into effect from the first day the first day of overrun. However, we advise you to consider amicable collection before considering possible penalties.

 

How to calculate late penalties?

Legal requirements for using late payment penalties:

A little legal reminder, the law allows all companies to use late payment penalties provided they have a commercial relationship with a professional. On the other hand, the non-professional entities are therefore excluded from the scheme.

Every company must anticipate the penalties and make sure to mention them:

• The general terms and conditions of sale,
• The estimate or purchase order,
• Invoices,

In the case of late payment, the company must mention the conditions of application of the interest rate as well as the penalties.

In the event that the general conditions conditions do not specify a rate, the law provides for a single single rate of application.

 

Calculation of the rate of late payment penalties and lump sum compensation :

The latest ECB rate (dated July 27, 2022) is 0.50%. Any company wishing to use late payment penalties is required to charge, at a minimum, three times the minimum rate.

The rate minimum must therefore correspond to 1.5% (1.5% = 3 x 0.50%). Concerning the maximum rateThe maximum rate is 10 points higher than the minimum rate: 10.5% (10.5% = 10% + 0.5%).

• Minimum late payment penalty rate in 2022: 1.5%.
• Maximum rate of late payment penalties in 2022: 10.5

Now that the penalty rate is calculated, it is necessary to incorporate it into a formula to calculate the actual amount of late penalties.

Amount of the late payment penalties = (Amount including VAT or excluding VAT x Penalty rate) x (number of days late / number of days in the year).

To this formula can be added the amount of lump sum compensation. This amount is different from the amount of the late payment penalties. It corresponds to 40 € per unpaid invoice.

For example, a company is 30 days late in collecting an invoice. The penalty rate is 10.5%. The lump sum compensation applies. The total amount of the invoice including VAT is 30,000 euros.

Cumulation of the amount of the late payment penalties and the fixed compensation = (30,000 x 10.5%) x (30 / 365) + (40 x 30) = 1202.58 euros.

 

How to prevent late penalties?

Penalties are due from the first day of delay. The crediting company can therefore send an invoice mentioning the penalty rate and the lump sum compensation.

However, the law does not require mandatory recovery of penalties and indemnity. They can thus be used as a warning in the recovery operation.

The objective of collection is to preserve the quality of your commercial relations and your cash flow.

Aston AI is an ideal solution to prevent late payments. This collection solution allows you toautomate customer remindersto personalize them, to follow all the deadlines, and to automate the creation of invoices.