• Commercial Interest Rate Basics
  • September 23, 2014 | Author: David Brown
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cleveland Office
  • Ohio R.C. § 1343.01 caps commercial interest rates at 8% per annum with respect to bonds, bills, promissory notes, or other instruments of writing for the forbearance or payment of money at any future time. However, there are several broad exceptions which provide for interest rates above and beyond the maximum rate of 8%. Particularly, R.C. 1343.01(B)(6)(a) states that:

    Any party may agree to pay a rate of interest in excess of the maximum rate provided in division (A) of this section when:

    (6)(a) The loan is a business loan to a business association or partnership, a person owning and operating a business as a sole proprietor; any persons owning and operating a business as joint ventures,  joint tenants, or tenants in common; any limited partnership; or any trustee owning or operating a business or whose beneficiaries own or operate a business....

    In other words, loans made or goods sold to commercial entities, or individuals operating as sole proprietorships, can be subject to any agreed upon interest rate.  The question is, how do parties to a commercial transaction "agree to pay a rate of interest in excess of the maximum rate of 8%?" R.C. 1343.03 addresses this question. Specifically, that section states:

    When money becomes due and payable upon any bond, bill, note, or other instrument of writing, upon any book account, upon any settlement between parties, upon all verbal contracts entered into, and upon all judgments, decrees, and orders of any judicial tribunal for the payment of money arising out ... a contract or other transaction, the creditor is entitled to interest at the rate per annum determined pursuant to section 5703.47 of the Revised Code, unless a written contract provides a different rate of interest in relation to the money that becomes due and payable, in which case the creditor is entitled to interest at the rate provided in that contract.

    Thus, it is required that all agreements to pay interest at a rate in excess of the maximum rate of 8% must be in writing. If there is no writing, the creditor will be limited to an annual interest rate equal to the federal short term rate, plus 3% (default rate). The default rate for 2012, 2013 and 2014 has been 3% as a result of historically low federal short term interest rates. For a list of default rates by year, visit http://www.tax.ohio.gov/ohio&under;individual/individual/interest&under;rates.aspx.

    Ohio courts have further made clear that the writing must be one to which both contracting parties have assented. In other words, there must be (1) a written contract signed by both parties, and (2) the contract must provide a rate of interest with respect to money that becomes due and payable.  A subsequent invoice or monthly statement - or any other "one-way agreement" - will not constitute such a writing.1 Thus, it is imperative that commercial creditors include applicable interest rates in their notes, credit applications, engagement letters, etc. Otherwise, in the event of a default, the creditor will be limited to the default rate outlined in R.C. 5703.47, regardless of the fine print included on its invoice.

    With this in mind, it's a good idea to review your standard business agreements to ensure that applicable interest rates to be charged throughout the course of the transaction, and in the event of a late payment or default are included. If your standard business practice is to do business on a handshake, without a written contract of any kind, you should reconsider your policy as you will certainly be relegated to collecting no more than the default interest rate as set forth in R.C. 5703.47.  Of course, the attorneys at WWR are more than happy to review your documents and policies, and discuss how you can improve them and better protect your right to collect interest in excess of the default rate for all of your commercial transactions.

    1 See for example WC Milling, LLC v. W. Dale Grooms (4th Dist., 2005), 164 Ohio App.3d 45, 52.