Charging Interest and Late Fees
How to effectively and legally charge for late paymentsYou completed your end of the deal – rendering services or delivering goods – but now your client is ignoring the invoice. You can charge a late fee or interest, but make sure the original contract the client has signed clearly states any fees or interest charges that will be assessed.
Three important things to know:
- Assess late fees only if a written agreement outlines this option. Be sure to include the phrase: "Accounts not paid within terms are subject to a ___% monthly finance charge."
- Don't charge more than 10 percent interest per year. Some states restrict the amount of late fees, but you're most likely safe if you keep cap it at 10 percent.
- Try waving a carrot instead of a stick by offering a discount for either full payment upfront or within 30 days. Sometimes incentives to pay early or on time can be more effective than threats of fees and interest charges.
Select software with built-in templates for charging fees and interest
Use the right forms that include agreement to pay interestA promissory note is a written promise to pay money that is owed. This is written evidence of the debt and the terms under which it will be paid, including any interest or late fees.
Send a demand letterIf someone owes you money and gets behind on the payment plan, work out a new one. If that doesn't work, send a demand letter. But don't threaten to take action -- for example, sue in small claims court – unless you intend to really do it.
Use calculators to figure out interest ratesLate fees are usually assessed as a monthly finance charge.
- To calculate late fees, first decide on the annual interest rate you want to charge, then divide that by 12. Next, multiply that monthly rate by the amount due to arrive at the monthly late fee. Example: You have a 12 percent late fee on a $10,000 project. Divide 10,000 by 12 and get a monthly interest rate of 1 percent. Then multiply 1 percent by 10,000 - and you arrive at a $100 monthly late fee.
- Will clients really pay late fees and interest charges? Most small business owners dealing with slow-paying customers would be happy to just get paid – but documenting a paper trail that can be used as evidence in small claims court – and then threatening to take the client to court - can convince most customers to pay the whole bill – fees included.
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