Late payment penalties: the complete guide
Avoiding late payments should be a priority for any company concerned about its financial health. Late payment penalties can help limit them.
Late payment penalties: the complete guide
In France, late payment penalties are the cause of the bankruptcy of many companies. These imbalances weaken the cash flow of companies when they are too recurrent. It is therefore important to have effective processes and tools to avoid them.
Throughout this article, we will help you better understand the principle of the late payment penalty on an invoice by looking at the current state of the law. We will also take the time to list the optimal solutions to help you reduce your invoice payment delays.
What is a late payment penalty?
Penalty for late payment of an invoice: definition
A late payment penalty refers to an additional amount owed by a contracting party for late payment of an invoice. You can mention this financial penalty in your General Sales Conditions to encourage customers to pay invoices on time. Note that these late payment penalties apply automatically, without you having to send a formal notice or reminder to your customer.
What is the purpose of late payment penalties?
There are many reasons to include this penalty in your payment terms. On the one hand, payment penalties allow companies to better manage cash flow by encouraging customers to pay invoices on time. On the other hand, late payment penalties help businesses offset the additional costs of tracking and dunning late payments.
Invoice penalty rates: what does the current legislation say?
In France, the legislation on late invoice penalties is defined by the Commercial Code. According to article L441-6 of the French Commercial Code, if no payment term has been agreed upon, payment must be made within 30 days following the date of issuance of the invoice, the execution of the service or the receipt of the goods. Ideally, you should specify your terms and conditions of application as well as a late payment interest rate in your General Terms and Conditions of Sale (GTCS).
In concrete terms, the Commercial Code provides for a late payment penalty equal to a fixed sum or a specific rate per day of delay. Nevertheless, the rate of the late payment penalty cannot exceed 3 times the legal interest rate.
How do late payment penalties work?
How to calculate a penalty for late payment of an invoice?
Companies are free to define their payment terms and the rate of their late payment fees. However, they must take into consideration the minimum interest rate and the reference rate according to the European Central Bank.
The calculation of interest on arrears can be done in different ways. Some companies use a fixed interest rate to determine the amount of payment penalties, while others use a variable interest rate determined by a formula or fee schedule.
If necessary, use an unpaid invoice interest calculator to calculate the penalty rate that best suits your company's needs. Obviously, the higher your late payment penalty rate, the more it will deter a debtor.
Late payment penalty: what period should be considered?
If you are wondering when is the right time to request payment of your late fees, you should know that it is due from the debtor from the first day of delay. Therefore, there is no need for you to charge it.
It is important to note that late payment penalties are not mandatory. It is up to you to decide how you want to proceed by reaching an agreement with your customers. Indeed, these financial problems tend to damage professional relationships... Dialogue with the customer is sometimes preferable to solve a late payment problem.
Why is it important to monitor your payment terms?
According to IFOP, 1/4 of French companies go bankrupt because of late payments. It is therefore essential to monitor invoice payment times to ensure the longevity of your company. Monitoring payment deadlines is part of good financial management. On a daily basis, it can help you identify potential cash flow problems and anticipate risks.
What are the solutions to avoid penalties for late payment of bills?
Automate your supplier invoices
The first solution that will help you preserve your cash flow is to automate your supplier invoices. You will be able to better manage your cash flow by ensuring that invoices are sent on time and that payments are received on time. On the other hand, this automation facilitates the reconciliation between issued invoices and supplier payments. You avoid potential errors and duplicates. Finally, the advantage of an invoice automation tool is to have a better visibility on the financial operations. It provides you with an overview of the status of the invoices to monitor the invoice payment deadlines.
Make sure your customers are creditworthy
Finally, the last piece of advice we have to give you to avoid late payment interest: make sure your customers are solvent. Before signing a contract with them, take the time to find out if they are properly registered in the Trade and Companies Register (RCS).
We also recommend that you look at their business references. These may be professionals with whom they have already collaborated or with whom they are currently working.
Finally, do not hesitate to take a look at their annual accounts. This information is generally available on the website of the Greffe du Tribunal de Commerce, or via other online services. You will get valuable information about the financial state of the company.
Penalties for late invoicing: what you need to know
Late payment penalties are set by companies themselves and must be clearly stated in their General Terms and Conditions of Sale, but also on invoices. In order to preserve their cash flow and to protect themselves against late payments, companies have every interest in digitizing their invoicing process. The automation of supplier invoices, the integration of payment links in your financial documents and the use of digital payment methods appear as optimal solutions.
Looking for an all-in-one accounting management solution? Discover Regate! Regate is a true financial cockpit. You can use this platform to automate your supplier invoices, lighten your workload, keep an eye on all your financial operations, and above all save time on a daily basis. Learn more about Regate or schedule a demo with one of our experts!