You’ve delivered as promised to one of your clients. You’ve invoiced for services rendered. And you’ve waited… and waited… and still you haven’t been paid. Should you charge a late fee? If you do, will it harm your relationship with the client irrevocably (and should you care if it does)? Charging late fees may seem like a small decision, but it’s one that can be agonizing. Understanding what’s behind the late payment can help you determine whether to ding the customer for it, and establishing new strategies for invoicing can help you avoid the nasty situation in the first place.
Why Customers Pay Late
You can’t really predict whether late fees will force a customer to cough up the money they owe you if you don’t know why the customer is paying late. If your customer contracted for services but isn’t able to pay, the circumstances may govern your response. Perhaps the customer has hit a temporary tough patch, and all that’s needed is a reasonable payment plan. If that same customer continues to pay late, though, you may want to explain politely that you don’t work for free and move on.
Other customers pay late because they can. If you’re a small business, large customers may realize they hold all the cards and withhold pay just for the heck of it. Others may simply consider your invoice a low priority. In both cases, you may need to remind your customers that you’re not in the business of extending credit. Be prepared to let these customers go as well. Finally, some customers refuse to pay because they’re angry. In this case, the temptation may be to escalate the conflict, but in fact, you should do the opposite. Find out why the customer is angry, and go out of your way to fix the problem. You may even choose to give the customer a cash discount — which could be well worth it if you retain the customer’s business and good will.
When Can You Charge Late Fees?
While it’s tempting to slap late fees on an invoice that’s been sitting unpaid, be careful. You can only charge late fees or interest if the original contract for products and services allows it. Make sure when you draw up your contract that you specify the amount of late fees that can be charged (usually a percentage of the outstanding balance accruing monthly), and mention the time frame governing late fees as well. Even if you’re legally allowed to charge the late fees, you may find you actually get paid more quickly if you offer the customer incentives for paying (such as a discount if payment is received within a short time frame), rather than threatening the penalty of late fees.
Alternatives to Charging Late Fees
Charging late fees isn’t the only way to deal with delinquent accounts. By organizing your collection process and assigning an employee as a point person to reach out to late customers, you may be able to make payment arrangements. Create a script to help your collection representatives be consistent, and make sure they document every contact with the customer fully. Tech such as the Late Fee Manager app can also help you by sending reminders automatically.
Another positive step to avoid late fees is to establish invoicing procedures ahead of time that take into consideration the possibility of late pay. Consider offering incentives for early pay, and offer payment plans upfront. You might demand 50% of your fee before you start on a new project, invoicing for the remainder when you deliver. Be clear from the beginning about your invoicing procedures so your customer knows exactly what’s expected.
Assessing late fees isn’t always the best possible choice when you’re trying to get paid on a delinquent invoice. Establish payment protocols and procedures ahead of time, and try other routes to get paid.