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    How and Why a Business Should Charge Late Payment Fees

    Marcus Carlson - 2019-11-07T22:00:00.000Z

    Late payments can have a big impact on small businesses, especially when running costs depend on receiving money from clients. When an invoice is ignored, whether deliberately or accidentally, then a business is forced to undergo unnecessary work to chase payments.

    It is fair that a business should charge a late payment fee, as a penalty for ignoring an invoice and as a deterrent for future late payments. Here is a look at 15 common mistakes that businesses make on the topic of late payment fees, which we've conveniently split into three categories.

    Why You Shouldn’t Be Afraid of Charging Late Payment Fees

    • Don't underestimate how late payment fees show the professionalism of the business. This system reminds clients that they have an obligation to pay for your services and stops lazy customers from exploiting your trade.
    • Don't be afraid of using late payment fees to get ahead of the competition. You might hold off on chasing down a client knowing that they have contracts with some of your competitors – they’re bound to pay at some point, right? Wrong. Late fees can force that client to prioritize paying you over paying your rival.
    • Don't ignore the value of the company's cash flow. It is easy to think that your business can handle one or two late payments, particularly during a successful period. But late payments all add up, so getting on top of them early on with the threat of charges can help to keep the good times rolling.
    • Don't allow clients to repeatedly ignore invoices. A client that pays the late payment fee without any fuss is one you can trust again. A client that doesn’t have a good reason for lack of payment, whether on the original invoice or the additional charge, shouldn’t be a client again in the future.
    • Don’t feel bad for adding extra charges on a customer who has no justification for a late payment. Asking for more money is a task that many find difficult, but remember that this is money that your company deserves for providing its services or products.

    When You Should Be Charging Late Payment Fees

    • Don’t blindly charge late payment fees. One good thing to come from late payments is a chance for self-evaluation. Why haven’t they paid on time? Was the work good enough? Be certain that you’ve fulfilled your contract to a high standard – don’t chase down late payments for a job done badly.
    • Don’t spring late payment fees on a client without warning. Some businesses don’t make clients aware of such charges until it comes down to an overdue payment. This is a surefire way to break trust, especially if there is a valid explanation for delayed payment. Make sure late payment fees are laid out in any contract for your work.
    • Don’t forget to remind clients of the late payment fees when sending an invoice. Your ideal scenario is one where the client pays you on time for a job well done. That’s how customer loyalty develops, so take care to remind your client of your late payment terms on each invoice that you produce. Also, don’t hide this away in text that you need a magnifying glass to read! Smaller is okay, but it still needs to be legible.
    • Don’t feel like you have to treat each situation in the same way. A contract and prior warnings give you legal security, but the decision ultimately comes down to you.
    • Don’t be hard on clients with personal reasons for late payment. Illness or bereavement are two obvious situations where empathy is required, and goes a long way.
    • Don’t charge loyal clients who you normally can trust. Uncontrollable events can stop a well-meaning customer from paying. By showing leniency, you build a strong bond of trust between your company and client.

    What You Should Be Charging for Late Payment Fees

    • Don’t make up your own interest rate. Ensure that your interest rate is at a suitable level which complies with the law of the state where your business is based.
    • Don’t forget to convert the annual interest rate to a monthly charge. For example, a yearly interest rate of 24% becomes a 2% charge on a payment that is a month late.
    • Don’t shy away from using billing software to help you calculate an appropriate payment charge. This can save you your most important commodity: time! Such software may also be set up to alert you when clients are late with payments.
    • Similarly, don’t be afraid to rely on an invoice app to assist in working out charges. 

    By avoiding these 15 mistakes, you can ensure your business handles late payments in an efficient but empathetic manner.

    In turn, this will hopefully reduce the number of late payments that your business faces and make you seem even more trustworthy and professional.