Should You Charge Late Payment Fees on Invoices?

Late payment is a common problem for small businesses. How often have you completed the work, sent an invoice and waited weeks, if not months, to get paid? Or at least heard of stories like this?

Late payment is tough in normal times, but especially when times are tough. Not only does it become a financial burden, but an emotional one too.

A common solution to deal with late payment is to charge a late payment fee. It’s the obvious solution, right? You give the client a push to pay you now, or they incur more costs further along the line.

But is it that simple? Are there not situations where it’s a bad idea? And once you’ve decided to charge a late payment fee, how much do you charge? There, is, in fact, a lot to consider. In this post we’ll explore it all:

Why charging a late payment fee is a good idea Guidelines for charging these fees (and when it may be a bad idea) How much to charge Why Charging Late Payment Fees Can Be a Good Idea

Besides encouraging clients to pay, an overdue payment fee is a good idea for several other reasons:

You need the money – ASAP. In tough times, cash flow is especially important. Late payment fees can be an added incentive to get clients to pay you, sooner. While ideally you could avoid such measures, the mere idea of late payment fees might motivate clients to pay you as soon as they can, or at least communicate with you if they’re unable to. It establishes you as a serious professional who has a business to run. If you don’t include a late fee policy, the perception may be that a client who doesn’t pay on time can repeat this behavior. You get paid before other contractors do. The chances are that if that client isn’t paying you on time, he’s doing the same to other contractors. But if you have stricter payment policies and kick up a fuss, they’ll move your payment to the top of the pile.

While in principle, late payment fees work, there are instances when they’re not a good idea.

Guidelines for Charging Late Payment Fees

By following the below guidelines, you’ll better understand when it’s suitable to charge these fees.

1. Ask Yourself: Did the Work Fulfill the Estimate?

Clients are different. Some won’t pay you because, well, they’re bad clients. Others, still, won’t pay because they don’t have the money. But then there are those who aren’t happy with your service. But, instead of kicking up a fuss, they vent their anger by not paying you on time. They’re passive-aggressive.

Include a late payment fee in an invoice, only aggravates the problem. That’s why it’s important you check that the work fulfilled the estimate before you invoice. If it did, the client is most likely satisfied. You can now send your invoice and include payment terms so that there are no surprise late fees. Speaking of which…

2. Ask Yourself: Are Clients Aware of the Fee?

Nothing burns bridges faster than surprise charges. Don’t include late payment fees if clients aren’t expecting any. Rather, first establish expectations by:

Specifying the fee early on in the relationship, in writing, ideally through a contract.

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