Fixed collection charge

Why a collection charge?

Generally speaking, clients pay their purchase within the terms agreed with the vendor. The latter takes no further delay in account in his price calculation.  When delaying payment, the buyer generates costs.

What costs?  

When a payment is outstanding on due date, the creditor (vendor) needs to start a reminder procedure.  Hence, he needs equipment for such receivables management.  There are also variable costs (open invoices management, workforce, post stamps, etc.).  Most creditors sub-contract this task after 2 or 3 reminders.  This sub-contractor will invoice his costs.  And if he doesn’t sub contract the task, it is usually more expensive for the creditor.

Note: financial interests on the debt are not included in the fixed charge as they are added separately (see glossary)

Why fixed?

Reminder management is a succession of smallish steps (letter, phone call, payment control, etc.).  It could be itemized and priced however quite nit-picking a task.  But it would need to be justified with the debtor, which would add a layer of work.  A fixed charge makes it simple.

How to compute the fixed charge?

The charge is usually a percentage of the principal claim amount (example 10%).  There is often a minimum (for instance 60 EUR) because collecting 10 EUR is actually even expensive as collection 500 EUR.  I

For company debts, the law on combatting late payments in business transactions regulates this problem but parties can have their own contractual agreement.

For consumers, the charge is limited to contractual agreements; by law.  See also our article of March 2016 on collection costs.

Doe the creditor get rich with fixed charges on unpaid debts?

We have never met a creditor getting richer thanks to his client’s delayed payment.  If it were so, some creditors would organize themselves to multiply unpaid bills.  And the company that would survive such strategy does not exist.

On the other hand, we know some debtors who make debt collection such a complex matter that the fixed charge is far from compensating the actual costs.

Update 24/08/2016

Definitions provided under this section refer to the Belgian situation; unless specified otherwise. The texts are meant to summarize concepts in daily language and should not be considered as comprehensive or definite. We welcome suggestions for modifications or additions at glossary@tcm.be.