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.
I charge a 2% late fee and I note this in my standard agreement so prospective clients know my payment terms upfront. Has it stopped people from paying late? No. But if they are consistently late, I cut them loose.
If your agreement, contract or new account form/ credit application does not state that you can charge interest or late fee then you cannot until you notify them and they acknowledge reading the notice.
If they don't acknowledge the notice I would call them and tell them all work will stop until it is acknowledged.
I would also add : Should any invoice be sent for collections, you will be responsible for all fees to collect that debt including legal".
Many of our clients charge a late fee in percentage 1-1.5% per month. Remember to send them a new invoice each month including a line for interest/late fee.
You can always waive or reduce any fee.
We are told by our clients (going across numerous industries)that most invoices are paid in 45-48 days.
I charge 1½% per month, but only on amounts more than 60 days overdue.
We have built into our agreements 2% on the unpaid balances that become 30 days past due. I know that this will not motivate some people but it usually work for us. Her is a copy of the wording that we use, " Payments are due and payable upon receipt of the Architect’s bi-weekly or monthly invoice. Amounts unpaid thirty ( 30 ) days after the invoice date shall bear interest from the date payment is due at the rate of two percent ( 2 %). For each subsequent thirty ( 30 ) days this finance charge will be added to the unpaid balance and will be subject to the two percent ( 2% ) finance charge for that period." I hope that this helps.
Every small business has to juggle cash flow and decide who to pay when. If a client isn't paying you on time it's because his other creditors are screaming louder than you and he gets away it with you. You are in essence giving him a 0% APR loan with no strings attached. What a sweet deal!
We write a 20% APR late fee into all of our contracts that accrues daily. The late fee needs to be sufficiently painful and costly to prevent them from using you as their personal line of credit. If it's only 1% or 2% there's no incentive to pay you first. They should be able to secure other credit for significantly less than 20% APR (See my blog on this point: http://www.keenesystems.com/Blog/TabId/248/ArtMID/1323/ArticleID/9/Lance-Keene-interviewed-by-MSNBC-on-creative-financing-for-small-businesses.aspx )
We have a software consulting firm. In the past clients were getting $20k, $30k or even $50k behind in payments! It was getting out of control. That forced me to go into my corporate line of credit to make ends meet. That's both a direct expense (in interest) as well as greater risk for the company because if they are late it's a warning sign that they may default. So we did implemented 2 policies:
1. We stop work if they are a week late
2. We enforce the 20% APR late fee
The late fee usually doesn't amount to much but it has a great psychological effect because nobody likes to pay late fees.
Check with your attorney on exact wording for the late fee clause. One other reason why this clause is important is that if the client defaults and you have to sue them, it will probably take months to come up in court. During that time the interest accrues at 20% APR and the additional amount may even cover you your legal fees. But on a side note, you should also have to clause that they cover you attorney fees / collection fees if they don't pay their bill. Again your attorney can help you with that wording.
President, Keene Systems, Inc.
If you are setting up structures to entice, cajole, or compel clients to pay on time - you are building a long term problem for yourself.
I don't like doing this but I would say to them: "I do my work on time, I pay my debts on time, and I expect the people I serve to do the same. I only provide continuing services to clients that are up to date on their payments."
Going back in to impose a late fee after the contract is initiated won't make you any friends with the offender, even if you are in the right. I'd make the next communication about the issue pretty clear that a 10% penalty applies to late payments, even if it is not spelled out in your existing agreement. Honestly, if you are only waiting a few weeks for payment, you're doing a lot better than most! We all have at least one or two "problem children" that consistently you have to harass about payments. In many cases, it is the large enterprises that are the worst, since they have such bloated management structures often invoices get shuffled around and forgotten.
Good luck! Sometimes you let the little things slide and worry about the big ones. To me, it's an annoyance, but should not damage your relationship with the customer.
Create a policy for future and type that on invoice for your clients.
Hi Libby -- I add a note to the invoice "payments made after X days after the agreed upon due date will be increased to include a 15% late charge." I wouldn't go higher than 25%. Is your work a physical product? I make video for clients and they do not get the final files until payment is made. Plus - I charge 50% to start the project - or at the beginning of each month.