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San Diego Businesses: Using On-Time Payment and Interest Clauses

With any contract in which payment is not due on delivery — typical vendor and service contracts, for example — it is essential to communicate in the contract the expectation that payment will be made on time; monthly interest provisions are also essential. In this respect, you need a talented and experienced business attorney to help draft your contracts.

San Diego Business Contracts: Getting Paid on Time

Every San Diego and California business experiences a customer or client that fails to pay on time. This may be a regular part of your business or a rare occurrence. Obviously, this is unacceptable, impacting cash-flow, and your ability to pay on time.

A good business lawyer can help with slow-paying customers by drafting “on-time-payment” and interest clauses for your various business contracts. The former is a clear statement that you expect payment within the stated number of calendar days; the latter states that interest, at a certain monthly rate, will be added for the failure to pay within the stated number of days. These provisions help you get paid on time in two ways: first, such clauses clearly communicate the expectation of on-time payments and, second, the interest provision provides an incentive to pay on time.

San Diego Business Contracts: Sample Contract Language

We have probably all seen examples of such clauses. Here is a typical contract provision that combines the on-time-payment expectation with the interest provision:

On-Time-Payment And Monthly Interest. CUSTOMER agrees to pay all invoices sent by COMPANY within ________ (__) calendar days from the date of the invoice. COMPANY shall add — and CUSTOMER agrees to pay — a monthly interest charge of ____ percent (__%) on all overdue balances, compounded monthly. In addition, CUSTOMER shall be responsible for all collection or legal fees and litigation expenses necessitated by lateness or default in payment.”

San Diego Business Contracts: Advantages of On-Time-Payment and Interest Clauses

In addition to giving your customers an incentive to pay on time, there are several other advantages to including such clauses.

  • First, while you may not be happy about late payments, the costs to your business are mitigated, at least somewhat, by being able to add interest.
  • Second, in the event of litigation, you are now contractually allowed to recover pre-judgment interest. This protects your business profits over the long length of time that litigation often takes.
  • Third, as a potent element of damages, the service charge/interest provision increases the litigation risk to your customer which increases the chance of settlement.
  • Fourth, because the on-time and interest provisions were agreed to when the contract(s) was/were signed, there is a smaller chance that your customer will fight about the extra charges if they fall behind in payments.
  • Fifth, the interest charges can be a “bargaining chip” of sorts if negotiations are ever needed.
  • Finally, such provisions are a way of allowing your customers a subtle grace period without such being a financial burden to your business. If the customer knows that the interest is due, but the cash flow is tight, then your customer can pay late, but add the service charge and still remain on good terms.

San Diego Business Contracts: How Much to Charge

Anywhere from 1.5% to 2.0% should be deemed reasonable under California law. There are a number of California prompt payment statutes with respect to the construction industry and, under those statutes, allowable monthly interest penalties range from 1.5% to 2.0%. For example, Cal. Civ. Code § 8818 provides a 2.0% monthly interest penalty in lieu of any other interest due if a homeowner/property owner wrongfully withholds progress payments to a builder/contractor.

San Diego Business Contracts: Contact San Diego Corporate Law Today

If you would like to discuss adding on-time payment and interest clauses to your business contracts, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” for 2015, 2016, and 2017 by Mr. Leonard can review your business contracts and he has the experience and knowledge to ensure that all of your written contracts help your business succeed and reduce the costs of slow payment. Mr. Leonard can be reached at (858) 483-9200 or via email.

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Schedule a Consultation: 858.483.9200