Typical questions often asked about charging late fees by small business owners include: Should you charge a late fee? How much should I charge? Will it alienate your customers? The answer is always, “Yes! Charge enough to cover your costs. If it alienates them, that’s OK, they owe you money.”
Ok. Perhaps that was a little blunt. Let’s look at late fees a little closer. The first question is whether or not you should charge a late fee. And the answer is absolutely YES. You did the work. Now it’s time to get paid. You’ve paid for materials. You’ve paid your employees. And now it’s time for your customer to pay you.
Let’s put it this way…how long do you think your staff would stick around if you only paid them when you got paid. And what happens if you pay your mortgage late? Or your car payment or your credit card bill? The fact is, society today understands there are certain expectations and certain consequences. The way you run your business should be no different.
So now that we have decided to charge late fees, the question is how much? There are two things to remember here. The first is that a late fee is NOT meant to be a penalty. It is simply compensation for costs incurred in the collection of the funds. That includes the value of money, staff to make phone calls, or software to resend invoices.
The second piece is that state laws may apply here. Every state has specific laws regarding the setting and collecting of late fees. Generally speaking, in order to avoid exceeding any thresholds, the total amount charged in late fees should not exceed 10% of the original invoiced amount. So take 10% and divide by 12. That’s barely more than 0.8% (0.008) per month.
This leads to the next issue. Fixed fee versus percentage. The key here is the amount owed. If someone owes you just a few bucks, .8% is not going to matter. So a flat $5 or $10 makes more sense. Likewise, if someone owes you a few grand, $5 or $10 is peanuts. So a percentage makes more sense.
Now let’s talk recurring versus one-time. If someone owes you money, and you’ve already assessed a one-time late fee, then there really is no further incentive for them to pay. This is why recurring is important.
Lastly, none of this matters if you do not have late fees defined in the initial agreement. You cannot charge a late fee if it was not disclosed clearly up front. In order to obtain a late fee, there must be some agreement between the parties before the transaction that provides for late fees. The agreement can be as simple as a conspicuously placed sign in the store that advises of the late-fee policy or a letter to customers explaining it. If purchase-order forms are used, the form should state the late fee policy. Your policy should clearly state both the amount and the time frame in which you expect payment (“A $25 late fee will be charged for payments not received within 30 days of purchase.”)
Another technique would be to make sure that late fees are listed on all of your invoices. A simple line in the footer that says “A $5 late fee will be applied to all invoices not paid within 30 days of the invoice date” would be a very specific notice. Something a little simpler may also be sufficient and may say “Late fees may be applied to past due balances.” But remember, don’t make threats if you are not going to act. If you say a late fee of $5 will be added, make sure it is automatic. Use a billing software that automatically calculates and applies late fees. But make sure that the fee can be easily removed or waived if necessary, because at the end of the day, keeping a customer is more important that 0.8%. And finally, no business WANTS to get paid late. And no business WANTS to have to charge late fees. So use a billing software that sends an automated, customized and personalized reminder to customers a day or two before late fees are to be applied. Remind the customer about the late fee. Give them an option to avoid late fees by paying instantly online. But also let them know that if they have already sent a payment, it will be recorded as soon as received. And always thank them for their business.