How much do you charge in late fees?
I have a client that is consistently late with paying invoices. It's never incredibly late, usually one week to three weeks late, but it's happened for the past 4 months. I have addressed this issue many times and it just isn't getting any better. I mentioned in my last email that if this continues, I want to discuss amending our contract to cover late fees.
I'm unsure how much to charge. The monthly invoices are only for a couple hundred dollars, so a percentage markup like 5-10% doesn't seem like enough motivation to pay on time. I don't want to charge something exorbitant. What do you recommend?
In advance u have to tell that u have a late fee fixed 20 usd
In my experience, it's best to offer a discount paying early (1.5%) rather than penalizing your customer for being a few weeks late. It was not uncommon for me to receive payment after 90 days. If your receivables are a few weeks late, consider yourself very fortunate.
However, before you take action in resolving your issue, you'll need to consider your industry practice on this matter.
Libby, this is something you have to decide if you can live with. My experience is that if they are habitually late with no penalty, they will eventually get further and further behind. You may want to send out a letter reminding all clients of your late policy of 1.5% for any balances past due and then stick to it by billing the late fee on the next bill.
Companies evaluate the time-value of their money and have a certain percentage in mind that helps them determine which invoices to pay. It is likely that number is less than 5%. For example, some companies will pay on time for 2% net 20, but still others simply want to pay net 60 no matter what. Having a good relationship with your client can help you ask the right questions to determine what will motivate them to pay on time.
In one case, I had a candid conversation with my client and gave two examples of how their late payments were affecting my business, and they agreed to pay earlier. I helped the process by walking my bill around for the necessary approvals and dropped it on the desk of the person who paid bills. That worked because it was a small office and everyone knew me, but that could definitely backfire in other companies. I had another company insist that they pay net 60 (which ended up being closer to net 70 by the time I got the check) no matter what, and in that case you can bill each week (instead of each month) or ask for a retainer.
I know it's a little late now, but in the future you could consider offering an incentive to pay on time when starting with a new client (2% net 10, for example, knowing this cushion is built into your rates). I find giving an incentive to pay early is better than a penalty for paying late. This requires keeping an eye on them to be sure that you receive the check on time or bill them for that extra 2% they deducted on their next invoice.
well we are a small training company and these issues can be demotivating and time consuming !
we calculate our "break even ' costs and this becomes an advanced deposit payment " in order to guarantee our services/arrangement " with the balance needing to be paid on completion of the service.
This way we are assured of not totally losing out .
Set a policy. First late is a mistake that is forgiven. second late is 5% the cost of the invoice and third and future late is 10% the cost of the invoice. Put it in place and send both letters and emails to all the customers. To this particular customer explain that they have used all the levels and you will need (25-50%) in advance for all future work. That way they have something already invested in the products/services and the rest is due upon receipt. They will come back with an alternative and set them straight, work out something you can live with but be firm.
I have the same issue with some clients. You could ask for a retainer from them and going forward with new clients, charge a retainer fee. You can also make them pay in advance of the work. You do run the risk of getting fired without warning but at least you always get paid for the work you've done. Also, if they pay the advanced invoice late, you can simply say that until the invoice is paid no work will be done on the account.
A short answer is to put in to your Terms and Conditions what you define as late payment, e.g. 7 days over terms. Further that your fee for payment outside those terms is Statutory Interest (used by the Courts), and what you would apply if you were indeed going to take the matter through litigation upon default.
On items that are returned unpaid I would ask your bank what they charge for a returned item, and again put that in your terms and conditions.
What I am concerned about, and have been for a large majority of my time in Commercial Credit Management, is the bullying that goes on by large PLCs and larger Limited Companies who try to dictate the terms of trade, telling the small trader that it is the PLCs "policy" to pay on 60 days. This is one of the reasons why small business with low profit margins having to service an overdraft at an absurd rate compared to Base Rate.
You have to cost out what it is costing you to service that over terms payment, and either surcharge through a seperate invoice, and if the firm defaults on that as well, consider whether it is actually worth trading with them. It may sound silly to turn down a large account, but ultimately if it is costing you more to service the debt than the profit that firm should be generating for you then they are a viable customer.
Many companies think they are "bomb-proof", because they are so large, but they are the first to go to Court if a smaller business defaults on payment. More to the point you can have your fingers seriously burned if that PLC goes in to Administration or is Compulsorily Wound Up under inslovency rules. More small business go bust because large PLCs hold out on paying, causing cashflow problems and a vexatious Creditor such as a bank who may foreclose on an overdraft under a Debenture (more frequently used than ever before) or Winding up petition.
I know this is a long answer, but you have to take all the above in to account when setting your terms and the cost which needs to be passed on to your (not so good) customer. Finally remember to put your penalties for late payment in the original contract of supply, which created the account, and also on the back of your invoices.
Well, what I've done with some new clients is, before accepting the project or generating an estimate, make a little research of who is the client or organization (public, government, private…) and get to know their payment policies (3,6, 9 weeks), then I add up an extra "compensating percentage" to the total. Obviously the concept WILL NOT appear as such. Considering the 'normal' base price for the work, add a quantity that may cover the costs in terms of man-time, changes to the design, calls, emails or extra weeks waiting for the complete payment. Additionally, in the estimate I have the concept of the advance payment which is a 50% to 30% depending of the client's policies, that assures me less stress during the waiting lapse. So when the client accepts the estimate, I'm already covered in case of almost any unexpected devious or tortious issue.
Change the way you communicate with this client. Give them a price for the service before you perform it. Then I would also tell them you need a credit card on file for your services. You can bill them in advance for your work.