Wouldn’t it be great if all the invoices you sent were paid on or before the due date? Unfortunately, this isn’t the case for many freelancers and business owners.
Getting paid on time is more than about business etiquette—it can be the difference between your company succeeding or failing.
Unpaid invoices are a growing concern for entrepreneurs, with roughly 43% of freelancers struggling to get payments on unpaid invoices. But it’s even worse for the younger entrepreneur between 18 and 34, which is at 58% of freelancers trying to get money owed.
The problem has grown so much that some governments are looking to take action. There are proposals to help “clampdown on late payment.” Some of the ideas include:
- Requiring big businesses to appoint a non-executive director to ensure on-time payments
- Enabling trade bodies to emphasize the best and worst practice
- Promoting innovative technologies like accounting and invoicing software
Meanwhile, what can you do on your part to help deter clients from skipping out on paying your invoice?
Charge late fees.
But how do you go about charging penalties for late payments without scaring away your customers?
Here’s a quick guide on how to charge a late fee for invoice payments like a professional.
Late Fees Are a Common Practice
If the idea of charging a late fee makes you feel uncomfortable, just think about all the businesses you’ve ever come across.
Most major corporations that offer a service also charge late fees. This is true with cable companies, phone companies, electric companies, banks, and the list goes on.
If you’re not required to pay upfront for a service, then you’re given an invoice with a due date. Miss this date and you’re going to pay more than you had to if you paid on time.
But it’s not the fee that’s important – it’s the sense of urgency it creates. No one likes paying more than they have to so late charges help to prevent late payments.
And that’s exactly what you want to do.
Is it Legal to Charge Late Fees?
Late fees, in general, are perfectly legal to charge customers. Of course, there are some guidelines you have to follow when doing so.
For instance, you can’t charge an obscene amount of money. But what’s considered reasonable? This is left for the company to decide, but the amount should be fair. And make sure it’s an amount allowed by your country or local laws.
All it takes is a little common sense to determine this. For instance, it seems fair to charge a $150 late fee on a project worth $4,000.
However, charging a $100 late fee for a project worth $200 doesn’t.
If you ever end up in court and have to defend your late fee charge, you want it to be reasonable or it could make your business look deceptive.
Also, it’s essential to notify customers of your late fee charge before offering your services to them. Typically, this is outlined inside of your contract and terms and conditions policy. Be sure the customer reads and signs the document.
Your contract should make it clear how long the customer has to pay for your invoices. And what happens once they don’t (i.e. a 5% late fee).
How Charging a Late Fee for Invoice Payments Can Benefit Your Business
One of the top benefits of charging late fees for invoices is that it helps to promote on-time payments. Again, no one wants to pay more for a product or service than what they were initially quoted.
They have complete control to avoid the late charge by simply paying on time. If you give them ample time, then this shouldn’t be a problem.
Late fees also make your business look legit and professional. As we mentioned, a lot of well-known companies charge late fees so it’s nothing foreign.
Plus, bills with late fees are placed as a priority over the bills that don’t.
Last, charging late fees will help ensure you make up for your losses due to the late payment.
For example, if you have a $2,000 project waiting for payment and you charge a $100 late fee, it’ll make taking the time to send out invoice payment reminders worthwhile.
Why Some Customers Pay Late
As a business owner, you want to do whatever you can to keep your customers happy. This includes being flexible when the need arises.
You may learn that one customer had their accounts hacked and are quickly working things out. In this case, you may want to show a little mercy and forego charging a late fee.
There’s no sure way to determine whether charging a late fee will guarantee an on-time payment, especially if you’re unaware of their situation.
This is why communication is so important. Not only does reaching out help ensure you get paid. But it can also help with building solid customer relationships.
However, not all customers are as innocent. You’re going to run into some customers who forget, don’t have the money, or downright refuses to pay.
In certain circumstances, you may have to work out a payment plan that’s reasonable for both parties. But if this becomes a recurring issue with a particular customer, then you should consider politely “firing” them.
In the event a customer is upset and refusing to pay, you’ll need to find out the issue. Maybe it’s something wrong with the service provided.
In this case, it’s a problem on your end that requires fixing. Work this out and then maybe they’ll give you the payment owed. It would be a great idea to offer an incentive or discount to make up for the mistake.
When to Charge Late Fees to a Customer?
You can’t slap on late fees for invoices that are unpaid just because you want to. Particularly if it isn’t in the original agreement, written or otherwise.
It’s required that you have a contract outlining your late fees so customers know in advance what to expect in the event they don’t pay on time.
Be sure to write up a contract that specifies your late fee amount. Normally, this is a percentage of the total invoice amount.
Also, don’t just use late fees to entice customers to pay on time. Offer incentives, such as discounts for paying before the due date.
Before trying to enforce your late payment fees, be sure to look over the situation. For example, did your services fulfill the estimate?
If the customer feels ripped off or dissatisfied with the work, then it wouldn’t be a good idea to enforce the late fees until you fix the problem.
Next, make sure the customer is aware of the fee. If not, then popping up with an email or invoice with a late fee charge is going to rub them the wrong way. It may even lose you future business with them.
Last, be sure that your late fee is justified. As we mentioned before, learn the situation of the customer before you begin sending emails with payment reminders and late charge notifications.
Not every situation is the same, so you’ll have to use your better judgment to make the right call. Remember, your customers are people, not walking dollar signs!
Businesses that are impersonal will struggle with customer acquisition and retention.
How Much Should Your Late Fee Be?
When deciding what to charge your customers in late fees, keep one thing in mind:
Late fees are to motivate prompt payments, not to give you a bonus or additional revenue stream.
There needs to be a balance. The fee should be high enough to make customers react but low enough so it’s not distasteful.
This will especially harm relationships if you’re charging over-the-top fees for an invoice that’s 24 hours late. Before setting your fee rate, check with your local laws regarding interest rate caps.
Identify the max interest rate you can charge in your area. For example, some places allow up to 18% annually. This works out to 1.5% per 30 days.
For an invoice that’s $4,000, that translates to a $60 late fee. But that’s if you give clients 30 days to pay an invoice. If you give 15 days, then it would be 15/365, multiplied by 18%, and the total of the invoice ($4,000).
This totals to a $30 late fee charge.
It’s a good idea to research what other companies are charging in your industry and do something similar. You can either use the above formula to create a flat fee or simply put a designated percentage amount.
How to Enforce Late Payment Fees
Once you know how much to charge for your late fees, it’s time to enforce them when necessary. You want to do this when you know the customer is refusing to pay vs unable to pay.
Since you outlined your late fee terms in the contract, there shouldn’t be any confusion when you enforce it. The first step is to send a payment reminder email.
It’s a good rule of thumb to send payment reminders in advance of the due date. Some customers are forgetful or busy.
Once the due date passes, send follow-up emails and phone calls to find out an ETA for invoice payment.
In the email, include a subject line with the invoice number and amount. In the body of the email, be courteous. Inquire about the invoice payment and include information about the amount, late fee charge, and due date.
Include a link or attachment of your invoice so they can quickly make the payment while it’s on their mind. You can do this with the invoicely platform, which allows online payments.
You can even set up payment reminders so the process is automated. This also makes it easier to keep track of which invoices are pending and paid for.
Make note of clients that give you a hard time with receiving payments and make the decision of whether it’s worth to continue doing business with them.
How Do You Handle Late-Paying Customers?
There’s a lot that goes into running a business. If you don’t have a strategy and policies in place to encourage timely payments, then you’ll also have to wear the hat of a bill collector.
Who wants that?
With these tips, you can help ensure you’re doing everything you can to receive on-time invoice payments.
Let us know in the comments how you deal with your late-paying customers!