Pretty much any business is familiar with the term “accounts receivable.” Accounts receivable are also known as “AR” or “receivables.” Accounts receivable are a result of unpaid invoices. Accounts receivable make businesses a creditor and its customer/client a debtor. Businesses hate accounts receivable.

Many businesses try and minimize the sting from AR by charging money on past due accounts. The North Dakota Century Code allows businesses (referred to as a creditor in the Century Code under these circumstances) to collect a late payment charge on accounts receivable.

The Law

North Dakota law provides:

1. A creditor may charge, receive, and collect a late payment charge on all money due on account from thirty days after the obligation of the debtor to pay has been incurred. A creditor may assign an account receivable that is subject to this section. An assignee of an account receivable has the same right to charge a late payment charge as does an original creditor for the assigned account receivable.
2. The late payment charge allowed under this section may not exceed one and three-fourths percent per month.
3. The late payment charge allowed under this section may not be charged unless, when the obligation was incurred, the creditor did not intend to extend any credit beyond thirty days and any late payment of the obligation was unanticipated.
4. This section does not apply to:

• Money due on retail installment contracts, as defined in chapter 51-13.
• Money due on revolving charge accounts, as defined in chapter 51-14.
• Money due a medical services provider on accounts receivable for medical bills.

What Does That Mean For My Business?

Charging 1.75% (meaning, 21% per year) on accounts receivable is a good way to incentivize a customer/client/debtor to pay. It’s also a good way to offset uncollectable invoices. No business collects 100% on all invoices.

There’s a catch, though. If a business doesn’t satisfy certain notice criteria, then the customer/client/debtor does not owe the late payment charge. The North Dakota Century Code provides:

A creditor may not charge the account receivable late payment charge provided for under section 13-01-14 or 13-01-14.1 unless the creditor promptly supplies the debtor with a statement as of the end of each monthly period, or other regular period agreed upon by the creditor and the debtor, in which there is any unpaid balance.

Such statement must state, in any order, the following:

• The percentage amount of the late payment charge will be charged beginning thirty days after the obligation is incurred for purposes of section 13-01-14, or beginning after the billed medical services become delinquent for purposes of section 13-01-14.1.
• The unpaid balance at the end of the period.
• An identification of any amount debited to the debtor’s account during the period.
• The payments made by or for the debtor to the creditor during the period.
• The amount of the late payment charge.

Additional items may be included in the statement to explain the computations made in determining the amount to be paid by the debtor.

There’s another catch. Businesses cannot charge this amount if it intends to extend credit to its customer/client. See Overboe v. Brodshaug, 2008 ND 112, ¶ 5, 751 N.W.2d 177. If a business intends to extend credit, then charges are capped by the usury laws under North Dakota Century Code Section 47-14-09. The current usury cap is seven percent. If businesses want to charge the full 21% per year instead of 7% per year on outstanding accounts receivable, it should avoid the terms “interest” and “finance charges” when referring to late payment charges.

In Conclusion

Late payment charges are a small part of a bigger picture. Businesses face many other collection and liability issues. Businesses should contact an attorney to make sure its core business contracts help achieve their goals. A business utilizing an attorney to review its core business contracts puts itself in a far superior position when (not if, when) it has to use them. It basically gives them the opportunity to write their own rules (with limitations, of course) in the event of a dispute.

If you run a business and need an attorney to review your business contracts, contact SW&L Attorneys’ Business Law Team to assist you.

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