Payment reminder and penalty interest: when and how much

In brief

• Penalty interest runs from the due date when the due date has been fixed in advance in a way that binds the debtor (section 5 of the Interest Act).
• Statutory interest is the reference rate + 8 percentage points for commercial contracts; the general rate is the reference rate + 7. Also check any agreed interest terms.
• The cost cap is 12 euros for a business-debt reminder and 50–110 euros for a professional collector’s demand. Reasonableness and timing rules also apply.
• Where payment under a commercial contract is late, the creditor is entitled to 40 euros as standard compensation for collection costs, with no itemisation of actual costs.

A payment reminder tells the customer which invoice remains unpaid and how to pay it. Check the basis for interest and collection costs before sending it. This guide mainly covers business debts; consumer debts and payments by public contracting authorities have partly different rules.

The payment period is 30 days at most unless a longer one is expressly agreed

Under section 5 of the Act on Payment Terms in Commercial Contracts, the payment period may exceed 30 days only if that has been expressly agreed, where the debtor is a trader. The Act covers payments between traders and payments between a trader and a contracting authority.

Express agreement means that the longer payment period was known to and accepted by both parties: it is stated in the quote, the order confirmation or the framework agreement. The customer’s standard accounts payable practice, or a longer term written onto the invoice afterwards, is a different thing from an agreed payment period.

Penalty interest starts from the due date

When a due date has been fixed in advance in a way that binds the debtor, section 5 of the Interest Act governs interest from that date. Agree on the payment term in the quote or contract. Simply writing a due date on the invoice does not make it contractually agreed.

If the due date has not been fixed in advance in a way that binds the debtor, penalty interest is payable under section 6 of the Interest Act from the point when 30 days have passed from the day on which the creditor sent the invoice or otherwise demanded payment of a specified sum. The debtor is not liable for penalty interest for the time before the invoice reached them.

Two different 30-day periods. The 30 days in section 5 of the Payment Terms Act are the maximum length of the payment period. The 30 days in section 6 of the Interest Act are the time after which interest starts to run when no due date has been fixed at all. Put a due date on the invoice and the rule that applies is section 5.

The rate is the reference rate plus seven or eight percentage points

Under section 4 of the Interest Act, penalty interest is payable on the overdue amount at an annual rate seven percentage points higher than the reference rate in force at the time.

Statutory interest under commercial contracts is the reference rate plus eight percentage points (section 4a). It applies to the covered payments between businesses and from contracting authorities to businesses. Businesses can also validly agree on another rate; this guide’s calculations use the statutory rate.

The reference rate is determined under section 12 of the Interest Act: it is the rate applied by the European Central Bank in its most recent main refinancing operation before the first calendar day of each half-year period, rounded up to the nearest half percentage point, and it applies for the following six months. The Bank of Finland publishes the reference rate and the penalty interest rates derived from it twice a year, with effect from the beginning of January and July. Check the rate in force there before you send a reminder; a delay that runs across the turn of the year falls under two different rates.

A consumer invoice must state the interest and when it starts

Under section 6 of the Interest Act, an invoice for a consumer debt must state the amount of the penalty interest and the date from which it is payable. An invoice between businesses carries no such requirement, but the note is useful there too: it tells the customer’s accounts payable what being late costs.

Reminders on a consumer debt also have a timetable of their own. Under section 10 b of the Debt Collection Act, collection costs for a payment reminder may be claimed on a consumer debt only if the invoice was sent at least 14 days before the due date and at least 14 days have passed from the due date before the reminder. This guide otherwise deals with business debts; consumer collection has its own cost caps and procedural rules.

The maximum collection costs are set in law

Section 10 e of the Debt Collection Act sets out how much may be claimed from the debtor when collecting a debt other than a consumer debt. For a payment reminder delivered in writing or by other durable means, a maximum of 12 euros may be claimed. For any other payment reminder – a phone call, for example – the actual costs of making it may be claimed.

The limits below apply to demands under section 5b of the Debt Collection Act sent by a professional debt collector. They are not automatic fees or rates for any letter labelled a payment demand. Costs must be reasonable, and the statutory timing and limits on the number of collection measures also apply.

A payment extension requested by the debtor may cost at most 10 euros if it extends the period by at least 14 days. A payment plan has a 30–75-euro cap, depending on principal, instalment count and the type of debt (sections 10e–10f).

Alongside these is the standard compensation in section 10 i of the Debt Collection Act. When payment under a commercial contract is late in a way that gives rise to a right to penalty interest, the creditor is entitled to 40 euros from the debtor as standard compensation for collection costs. The standard compensation requires no itemisation of actual costs. At the same time it sets a floor: for other collection costs the creditor is compensated only to the extent that they exceed the standard compensation. In practice the 12-euro reminder cost is contained in the 40 euros, and of a 90-euro demand for payment, for example, 50 euros remain to be claimed on top of the standard compensation.

Example: calculating penalty interest

The annual rate is converted into days late. The most common method is the actual days late divided by 365:

interest = principal × interest rate ÷ 100 × days late ÷ 365

The days late are counted from the day after the due date to the day of payment. In the example the reference rate is 3.0 per cent, which makes penalty interest under a commercial contract 3.0 + 8 = 11.0 per cent. The figure is an assumption for the example; the reference rate in force is the one published by the Bank of Finland.

The whole receivable is assembled the same way. Take a 4,800-euro invoice paid 45 days after the due date, with collection having reached the demand for payment:

For a part payment, the allocation between principal, interest and costs determines the new interest base. If 3,000 euros in the example is allocated to principal after 30 days, 1,800 euros remains for the next interest period. Split the calculation at the allocation date and use the remaining principal thereafter.

An example reminder schedule

Choose reminder timing within the law. Costs for a new reminder or payment demand for a business debt may only be charged once at least 10 days have passed since the previous one was sent (section 10f). Resolve a substantiated dispute before continuing voluntary collection (section 4b). The schedule below is an example, not a list of statutory deadlines.

A tratta may only be used for a due, clear and undisputed debt. The preceding reminder must allow at least 10 days for payment or objections (section 7). A tratta, court proceedings and accounting treatment are separate decisions, not automatic consequences of passing a date.

What a payment reminder must contain

A payment reminder is a document that the customer’s accounts payable can process as it stands. Six things must be evident from it:

• Original invoice number, date and due date.
• Outstanding principal and allocated part payments.
• Interest period, rate and amount.
• Basis and amount of collection costs. If you claim the 40-euro standard compensation, add other collection costs only to the extent that they exceed it.
• Payment deadline, bank account and reference.
• Contact details for questions and objections.

A clear breakdown helps the customer check the calculation and resolve errors. It also gives a collection service the information it needs if collection continues.

The contract settles the payment term, the interest and the reminder practice

The law sets the defaults, and the parties agree some of them themselves. Agree these four things in the quote, the order confirmation or the framework agreement, and record them in the customer register as well, so that they repeat on every invoice:

1. Payment term. More than 30 days between businesses requires express agreement. Public contracting authorities are subject to section 4.
2. Penalty interest on the invoice template. Record the rate applied and the day from which it is calculated, and the reminder then rests on the same wording as the invoice.
3. Reminder practice. Agree on communication and timing. The law regulates procedure and intervals as well as costs.
4. The consequences of delay. When further deliveries or new work orders wait for payment. In a continuing customer relationship this is agreed in advance, which makes stopping delivery a consequence provided for in the contract.

The default payment period for a public contracting authority is 30 days. Up to 60 days requires an express agreement and grounds under section 4 of the Payment Terms Act. The section 5 rule for businesses therefore cannot simply be applied to a public customer.

Checklist

Checks on the payment reminder and collection before sending.

• Payment term: check the agreed due date and rules for the customer type.
• Payments: match incoming payments before sending a reminder.
• Interest: use the applicable agreed or statutory rate and the correct period.
• Costs: check reasonableness, caps, number of measures and minimum intervals.
• Standard compensation: if claiming 40 euros, add other costs only to the extent that they exceed it.
• Consumer debt: follow the separate rules on interest, costs and timing.
• Disputes: investigate substantiated objections before continuing collection.
• Payment details: give a clear deadline, reference and contact details.