How and When You Should Charge Late Payment Fees on Invoices

Running a small business is no mean feat. There are so many plates to spin, and you are solely responsible for every department from IT all the way to sales and marketing. 

Add to that the pressure of balancing the books, and it’s hardly surprising that freelancers and small business owners are susceptible to stress — with finances a major shared concern.

According to Quickbooks, 71% of entrepreneurs have lost sleep worrying about late payments. And a recent study by Fundbox found that when clients miss invoice due dates, 79% of small business owners can’t pay themselves at the end of the month.

So what can you do to avoid sleepless nights and lack of personal income? Simple: charge a late payment fee.

What is a late payment fee? 

A late payment fee is charged to any customer who fails to pay their invoice by the agreed due date.

Late payment fees are a useful tool for businesses of all sizes, but are most commonly used by freelancers and SMEs to help control cash flow and protect themselves or the business from the impact of missed payments.

But how do you know when a payment is late? 

This depends on your business’ payment terms, which should be defined and outlined in every invoice you send out. Net 30 is the standard invoice term amongst small businesses — total due 30 days after invoice date — however terms may differ depending on industry and, really, you can define your payment terms however you please! So always check your industry standards, and compare them against your own needs before sending an invoice out.

Now, let’s assume you’ve now set your due date and are considering charging a late payment fee. The next question is: how much can you charge? 

It’s important to remember that the purpose of a late fee is to encourage timely payment, not to make more money. So, make the fee sufficient enough for people to act, but small enough to keep clients on your side. 

This starts with establishing an acceptable level of interest to charge — the US has different laws for each state, so familiarize yourself with those. Then, work out the monthly finance charge by dividing the state’s maximum by 12. For instance, if the rate is 20%, the monthly charge is 1.7% (20/12). For a $1000 invoice that is 30 days late, you can charge a late fee of $17 ($1000 x 0.017). 

3 tips for charging a late payment fee on an invoice

1. Ensure your late payment terms are clear

On one hand, charging late payment fees is key to maintaining healthy cash flow. But on the other, you won’t have any invoices going out without happy customers to partner with.

The solution? Be as transparent as possible with your customers so that they continue to work with you, and clearly explain your late payment terms on your original invoice. 

Nothing burns bridges faster than surprise charges, so ensure the client is aware of the fee at the start of your relationship by specifying the penalty in writing at the top of the invoice — not in the fine print. 

2. Devise a friendly follow up system 

Sometimes, a bit of empathy can go a long way.

Perhaps your client is suffering from some personal setbacks and distractions, or maybe they’ve encountered a financial disaster and are struggling to make ends meet. 

Having a system for politely following up on late payments can help to keep you cool, calm, and collected — the three holy grails of professionalism — while maintaining an amicable, productive relationship with the client. For example:

Strike 1 – Payment Due Date -  If you haven’t been paid on the due date, the first port of call is to check they have actually received the bill. Often emails can end up in a client’s junk through no fault of their own. 

Send a polite email reminding them of the invoice. This might be enough to jog their memory to pay it, or at least reassure you it’s on its way. 

Strike 2 – Two Weeks Late - If payment is two weeks late, you might begin to panic. 

But don’t! There’s almost always a good reason why your invoice hasn’t been paid. Call the client and ask why the payment is late, and remind them of the late payment fee — you may find they’re suddenly more responsive. 

Strike 3 – One Month Late - While you might feel like going to war at this point, it is key to remain professional (and persistent). 

If you have already spoken with the client, resend the invoice, including the late payment fee, and make sure you are talking to the right person — CC’ing someone more senior is a good way to get the ball rolling if you can. 

Be clear that you need to be paid, and politely inform them that you can’t continue to work with them until the bills are settled. 

For an easier way to deal with follow-ups, Perfect Invoice is, well, perfect. 

Unlike manual systems like Word or Excel, you can sort invoices by client name or due date, and set up automatic invoice reminders for overdue payments.

3. Don’t be scared to cut ties 

Once you’ve covered the basics — like ensuring the invoice has been received and the details are all accurate — and you’ve made friendly contact to check they’ve not just forgotten, what can you do about serial late payers?

In these cases, prevention can be better than cure.

Knowing your worth is super important when you run your own business, and a big part of that is cutting ties with anyone who continuously under-appreciates you.

Yes, it’s always possible that your customers are having financial difficulties. And yes, this may lead to late payments. But if a client often drops out of contact, or takes up hours of your time in follow up emails, it might be worth taking your business elsewhere.

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