Interest on Late Payment

The EU Directive on interest on late payments in commercial transactions came into force in Ireland on 8 August 2002.

Obviously, the right to charge interest on late payers was always available to credit managers if it was included in their terms and conditions of trade.

If we follow the UK experience, which has had similar legislation since 1998, then approximately only 2% of businesses will attempt to claim interest under the legislation.

The UK experience begs the question, why do so few suppliers charge interest? In our experience, credit managers fall into two camps. The first camp, and the majority, see their role as primarily getting the cash in. These credit managers may perceive that their managing directors frown upon such interest charges as a sales prevention device. They might also be anxious that most customers would laugh at the very idea and that they will take their business elsewhere. The second camp see their role as getting the cash in, and if they can’t get the cash in on time, then the customer should compensate the supplier.

Our own philosophy on charging interest is that it should only really be used as a persuasion tool. Our advice to suppliers is that they should divide their customers into three different categories, "good", "average" and "poor". Suppliers should then decide what "persuasion" techniques they should apply to each category. The "good" category customers should never be charged interest, on the basis it may alienate a customer who normally pays their bills on time. We would use interest as a persuasion tool with the "average" and "poor" category customers.

Charging Interest for the First Time?

If you haven’t charged your customers interest previously, how do you go about charging them for the first time? We suggest you send the customer a separate invoice for interest, preferably on different invoice stationary, so that it "sticks out". In practice, the customer will telephone you upon receipt of the invoice to discuss it. Indeed, the customer is likely to be indignant that you have charged him interest! During this phone call you are in a great position to negotiate. Firstly, you should explain, in a firm but friendly manner, that you are legally entitled to charge interest (either under the company’s terms of trade or under the Late Payment Legislation.) Then what we would suggest you do, in order to arrive at a "win win" ending, is suggest to the customer that you will issue a credit note for the interest invoice provided he pays, in full, the overdue balances within 7 days. If the customer agrees with this proposal, then you should go on to say that you will not raise any more invoices for interest in future, provided the customer pays his bills on time.

One great advantage in sending out invoices for interest, is that it shows customers that credit does have a cost, and that someone must pay for that cost. Every extra month that a customer takes to pay, he effectively obtains a 1% discount at your expense.


If you have placed a customer on stop, and have resorted to legal means to recover your debt, then you should certainly seek to recover any interest which may not have been previously charged. Credit managers should remember that the Statute of Limitations Period is six years, which means that they can sue for interest which is up to six years old.

For further information, contact Jim Stafford or Jonathan Foley of Friel Stafford, 44 Fitzwilliam Place, Dublin 2. Tel: 01 661 4066. Fax: 01 661 4145


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