From Interest to Finance Charges 💸
Rundoo switches from assessing daily interest to a monthly finance charge
Before jumping in, I want to highlight last week’s Primer: Bulk update ALL your data! Clients have LOVED it. So a quick plug to check it out 😊
Alright, during this summer busy season, we are fixing things we realized could be better. Today, let’s talk finance charges.
What are we talking about?
Many clients offer customers charge accounts. That is, customers can purchase materials now and pay for them later. Why is this valuable? Many contractors need materials for a job, but they aren’t paid until the job is complete.
When is the purchase due? The retailer can set a finance term for each customer. We most often see Net 30 Statement, meaning due 30 days after the retailer’s monthly statement run, but occasionally we’ll see Net 30 Invoice, meaning due 30 days after purchase, and other terms offered. As an example, if a customer has Net 30 Statement terms, the retailer sends customer statements at the end of the month, and the customer buys something on August 18th, that invoice won’t be due until 30 days after the end of the month, i.e. September 30th.
But what if the contractor doesn’t pay the invoice by its due date? Some clients choose to apply a penalty called a finance charge. This penalty is our focus today.
Problem: Rundoo assessed daily interest
Historically, Rundoo has charged daily interest. Clients could assign each customer a financing rate to be any annual percentage rate (APR) compounded daily, monthly, or yearly. Then, if a customer has a nonzero rate and any overdue invoices, interest accrued nightly.
We designed this because we thought it would encourage charge customers to pay sooner rather than later.
However, it has some problems!
First, interest continues to accrue when payment may be on the way. Let’s say a customer has an overdue balance of $100 and receives their statement. They mail in a check for $100 that takes two days to arrive. During that time, a few more cents of interest accrue! Thus, by the time the retailer receives the check, it doesn’t cover the full balance! This feels incorrect.
Second, it can be confusing! An 18% APR that is applied on each invoice and compounds daily, monthly, or yearly simply takes time to reconcile! To check a charge’s correctness, the customer would have to know when each invoice is due and the details of the rate.
Solution: Rundoo assesses monthly finance charge
First, we switch to monthly application as part of the statement run. The customer above will not get assessed any more finance charges until the next statement run. 🗓️
Second, we switch to a fixed finance charge rate rather than an interest calculation. This is a lot simpler! If a customer has $1000 overdue and a 1.5% finance charge, it’s a simple $15 charge. That’s it! ✅
How it works
Finance Charge settings consist of:
Rate: The percent to apply to the overdue balance each month.
Compounding: Whether or not to include existing finance charges in the balance.
Minimum Balance: If a customer has a balance below this amount, skip the charge. For example, you may not want to charge the $0.08 (1.5%) on someone with $5 overdue.
Minimum Charge: If a customer is set to receive a finance charge below this amount, charge this amount. For example, if someone has $100 overdue and would receive $1.50, you may want to round up to $5.
Grace Days: If an invoice is less than this many days late during the assessment, skip it. For example, some clients may want their due date to be Net 30 but they don’t actually assess a finance charge until 60 days.
What Next?
Your interest rates will be automatically switched to finance charges this week. You can see them in Admin > Customers.
A bunch more fixes to receivables will be coming in the next few months!
Finance charges will display as line items with dates on statements, rather than a lump sum.
Returns will have their own dedicated receipts, rather than use the sale receipt.
Customers will be able receive either balance forward or open item statements, rather than getting both.
👋