Interest has been drawing quite a bit of interest recently. It is therefore appropriate to consider the subject from a legal standpoint.
The current high interest rates charged by lenders creates special problems, especially for creditors. Construction industry creditors experience late payments in greater proportion now than in the recent past-their debtors are cash poor.
The impact of delayed payments is aggravated by the fact that those same creditors must pay huge interest rates for their needed funds while waiting for payments of their receivables.
Frequently, creditors do not have arrangements with their debtors to receive interest on unpaid debts at rates comparable to those which they must pay.
Unless otherwise provided by contract or special statute, the rate Of interest to which a creditor is entitled is generally fixed by state law The statutory interest rates are usually less than prevailing market interest rates although some state legislatures are now tying legal interest rates to fluctuating percentages.
Low "legal" interest rates frequently prompt debtors to delay making payments because they would otherwise be unable to borrow at the lower rates. They accordingly "borrow" from their creditors by not paying.
The astute businessman must therefore protect himself against the cost of-money crunch. One way would be to contractually provide for interest at a rate greater than the legal rate.
Contracts, signed purchase orders and/or credit applications should be written to provide for interest at a reasonable rate. Customers are not likely to balk at the higher rate at the time they contract. If they do, simply ask: "Don't you expect to pay on time?"
If a higher interest rate is not fixed in advance, the creditor should consider contacting his debtor and agreeing only to payment delay on condition that the debtor agree, in writing, to pay interest at an agreed higher percentage.
The practice of printing a note on billings that unpaid bills will draw interest at some high rate of interest may not be legally enforceable, absent a specific agreement to that effect or acquiescence by the debtor.
If a construction-related creditor pursues his mechanic's lien remedies, the applicable Colorado statute provides for interest at a rate of twelve percent per annum. Colorado court decisions appear to indicate that this rate of interest applies from the date the mechanic's lien statement is filed and until payment is made. Groussman Investment Co. v. York Plumbing and Heating, 166 Colo. 382, 443 P.2d (1968~. This provision is somewhat better, but twelve percent may still be less than what the creditor might have to pay for his borrowings.
It is essential that creditors pay careful attention to assure themselves that their receivables do not cause severe cash flow consequences because of high interest rates. Credit management can alleviate some of these problems if carefully studied and timely action is taken to protect against the impact of high interest rates.