I would try to give them better credit terms to make them pay faster say like 2% 10th Prox...If they cannot meet that request be careful...Figure the cost of money plus the opportunity cost lost for other clients who pay you on time...I would go to the wall with those who are stringing you out...
For our clients who charge a fee we typically see a late fee of 1.5% on invoices paid after the due date. But...it is a very delicate situation and a late fee should be weighed against the client relationship and your long-term business retention strategy. Depending on the size of your typical invoice, that 1.5% could be more costly in terms of damaged relationships and clients taking their business elsewhere. It may be preferable to communicate with the late payers, find out what is going on and see what can be worked out with them.
If you decide to begin charging a fee, be consistent. A late fee disclosure should be included on all your invoices. Include a late fee provision within your contract and/or engagement letter. Have this section initialed so no one can claim they didn't read it.
There are many times that a late fee is part of a contract or invoice but never enforced. If you aren't going to consistently enforce, it is not worth including it.
Check you local laws. In many places the maximum allowable late fee you can charge is 18% per year, or 1.5% per month. Make sure to note it in writing when discussing payment terms with customers. I would advise offering to renegotiate terms with existing customers who seem to need more time or incentive to pay within terms. Make sure your late payment policy is visible on all invoices sent to your customers, and either send monthly statements to customers with open balances, or resend invoices that are overdue with the late fee listed. Good luck.
This is an age old question to which I see that you have already received some rather sound advice. Several key points that I would point out include:
1. You can not successfully impute a late fee on current business as there is no agreement between you and the customer to do so.
2. A late fee may be tolerable to a customer with cash flow issues...just a tax, if you will, on the inability to pay right away. 1% or 2% may be much cheaper than taking out a loan and as such, may not have the desired effect.
3. You must groom your customers at the point of sale. That is, it is imperative that Sales recognize problem customers at the very beginning and create a pathway for such customers to become solid partners with you.
4. Two key metrics can help you track the success of any approach you take: a) Days Sales Outstanding and b) Sales to Receivables Ratio.
5. Finally, consider a positive incentive rather than the negative...would it be feasible, in your business, to offer a discount if paid within 10 or even 15 days from date of invoice? This could be a sliding scale based on the volume of the order.
I agree with others that you have to be transparent and up front with your customers in rolling out any such a plan. I truly understand your sensitivity toward angering your customers , so a carefully thought out communication plan is essential. How to get them on board quickly? Let the agreements begin with the very next order! Plan the positive and negative consequences carefully, have your Legal representative ensure that the language is supportable, and go for it. Don't forget to teach your Sales department the what and why of your plan...they should be part of it in the first place.
So here is an example from my background:
1. Company is a Fortune 100 Technology Giant
2. Sales were increasing at a 14.5% quarterly rate
3. Collections were decreasing to the point that Day Sales Outstanding had reached 93 (industry "standard" was around 42).
4. We created an incentive for Sales based on amount collected (monthly) as a ratio of sales volume, as well as sales volume (60%/40% split due to the emphasis on collectability of accounts)
5. Accounts Receivable received incentives based on Sales Volume and Collections (40% and 60% respectively as an emphasis on AR talking to Sales about customers and their likelihood of being able to pay, and an emphasis on collections.)
6. Sales language was changed to reflect new policies for prompt-pay incentives and penalties for late payment, including no future sales without an 85% down-payment.
7. Sales and AR teamed up and visited clients and talked to each of their respective counterparts (and then compared notes later)
8. Customers that just would not play well and partner with the business were "fired"...eliminated from the customer pool.
Results: $30 million in unanticipated revenue, month on month, for two years and Days Sales Outstanding dropping to 47 days in the first year to 34 days by the end of the second year. The customer base was refined with over 250 customers being "fired", and only 2% placed on the 85% down-payment list.
Finally, I give the example because the results shocked even me. Be careful and create your own program that will fully support the mission of your business and nurture true partnerships between you and your customers. Good luck in turning your customers into partners and please do not hesitate to dig deeper and ask further questions of the group. From the responses I have read, you have a ton of expertise at your fingertips.
Agreed you would have to have it embedded into you terms and conditions. Quite simply though, the squeaky wheel gets paid so while your are being nice and polite and gentle, others are getting paid by your customers. Its OK to be tough if your customers fail to respect your business relationship. Outline your requirements clearly and the consequences if not met. If customers are slow payers, really you don't want them on your books.
Start by implementing a credit policy, make sure you grant credit on a signed application and don't nust allow your customers to take it. That one simple step will fix an amazing number of payment issues.
I personally include a 16% late fee in all of my agreements. Every client who reads the agreement brings up the late fee, why so much and why 16%.
As Greg mentioned, tell them that you had a client how late paid x number of days and your accountant/bookkeeper was not happy. If they pay on time, they don't have to worry about it. This takes the onus off of you and makes your back office the bad guy. In addition, you also have the option of waiving the fee if they are a few days late, or can use the fee waiver to negotiate new business.
The 16% always catches their eye in a way that 1, 2, 10 or 15 can't. It is just so non-standard!
BTW. You can use an escalating late fee depending on whether they are a month, 3 months, etc. behind.
1.) It is not required for a business to provide credit to their customers. We always request our clients pay either 50% or the full amount before beginning any work. It's because we are not our clients' bank.
2.) You must include any late fee in all your terms and conditions and quotations. You can include it on your website as well.
2.) Each country and state/territory has its own rules on the amount a business can charge a person or another business. So you will need to investigate that to see what you can charge. Typically, it is no more than what a credit card company would charge.
3.) Speaking of credit cards, I would institute a policy that all of your business is transacted via ACH withdrawals through a service like Dwolla or Intuit Payment Network or JP Morgan Chase's QuickPay, or credit cards. It's how most lawn care companies work in today's environment.
Hi Lamar, Greg is right on, but I wanted to reiterate/emphasisze the fair notice doctrine. It's best if your contract calls for 1-2% late fees explicitly. Less favorable, but still effective is to note it on the invoice. AN additional option is to offer a discount for very rapid pay (notation would be 2/10 net 30, 1.5%/month thereafter). A 2% discount for payment within 10 days is effectively offering a 70+% annual interest rate on the customer's money. If they refuse an offer like that, they're in bad financial straights...have them talk with me, and I may be able to help them improve sales. :)
To avoid any discussions is to start with clarity in your general conditions, on invoices and of course in agreement of the job, delivery of services or any other activities.With personal calls or reminders (every 30 days) you can start a legal process if necessary.
You need to build documentation about case like this and even a strategy and patience, but at the end of the day you will learn and avoid such experiences in the future by selecting your clients better and tell them upfront what your rules are.
We decided to use a collection agency after a certain period of time as we need to be focused on our work and core business.The client needs to understand that your rate is based on correct and respected payment terms.
If your client is not able to pay, then find a way in steps or time frame to pay off the debt.
Success in your smart decisions
In business terms the late fee could also be called a surcharge or discount with terms of NET 30 or NET 45 and sliding scale fee of 1.5 - 2%.
It could also be presented as a " 2% discount" if the invoice is paid in 30 or 45 days. The clients will usually wait till the last day of the term to send the check.
Even then the clients will try to request for a fee waiver, which could be done at the discretion of the CFO and the importance of the client.
Same question for me: I was just stiffed for $10k plus travel, and it is the first time I have not been paid. 120 day delinquent. It has gone to legal and I was thinking of getting on the list over 90 a delinquent list which their bank won't like, but I believe a monthly interest rate and a late is appropriate. Thoughts?
Hi Lamar, explain per letter to all your customers that, due to the Economic depression, you have no choice but to begin a late payment charge fee. Point out that, just as you do not tolerate your team providing late services to them, so too, do you expect prompt payment. Prompt service = Prompt Payment.
You can do a late fee imposition on a sliding scale. first month non payment, 1%. Second month non payment 3% and so on. this will incentivise the accounts department to pay promptly or face the wrath of the Managing Director.
Dealing with late paying clients can be problematic - and you have to tread this carefully. Not all late paying customers are bad and not all good payers are great clients. This is an issue of judgement.
Also, some clients simply have a complex clearing process which does not help small suppliers. Delay is not caused by intent - it is by design. Real issue is when you have an ongoing business relationship and client is slow in paying. :) Tough then! You have to decide whether you want to have them as your client or simply let go!
What I suggest is that you should apply a pronged approach to deal with this. My inputs are:
1. Make financial terms very clear - have a clear contract.
2. Make penalties or surcharges very clear on your invoice - backed up by contract
3. Avoid linking emotional side of relationship with commercial/admin activities - Water and Oil do not mix
For all late payments, first step is to have a word with the client and explain the issue you face. Check whether there is anything that is causing friction. It could be just some missing info, missing process etc.
If everything is alright then you need to start getting firm. You should not apply any black-mailing techniques such as holding a critical delivery till payment is cleared - but apply judicious view on when to press hard, when to nudge and when to punch.
When nothing works, and if you are supported by proper contract and T&Cs, then legal/recovery mechanism is the only option provided you are willing to treat that path.
For accountants - there is always one header called 'Bad Debt' - this is part and parcel of doing business.
Last but not the least - there are companies who pay you timely as soon as you raise the invoice and recovery is their task. They charge 1%-2% fee to do so. I don't use them but if your clients can fall into 'dodgers category' - may be you should explore that.
Hope this helps!
Tell them if they are late more than once or more than one week (or whatever) they must pay ahead in the future.
I call my customers and request them to pay me with credit or debit card if they have been late by more than 15 days. And the next order they place, it is strictly on COD.
How about instead of a 'penalty'...you offer a discount for early payment.
When I was a landlord, instead of charging my tenants a 'Late Fee' I offered a discount for early payment. Bear with me...The market demanded a rent of $700 per month. We imposed a $50.00 fee for rent paid after the 5th of the month. What we did was changed the next lease to $750 per month, due by the 5th of the month. Tenant may enjoy a discount of $50.00 if rent is paid on the 1st.
Worked like a charm!
First, be proactive and work with clients not to be late with their payments. Earlier in my career I was a landlord for 7 years. I was always paid. I sat down with clients when they signed the lease and explained late fees, additional charges and the legal system. I informed them I did not want to have to file an unlawful detainer and negatively impact their credit rating (ability to buy a car, a house or have a higher interest rate on their credit card) if they did not pay timely. I was prepared to file an unlawful detainer if over 10 days late. I charged the maximum allowable late fee if late at all. I had renters indicate they could not pay the rent. I sat down with them and we worked it out. In seven years I was always paid on all units. I never had to file an unlawful detainer. I offer this as an example of being proactive with clients.
As an aside I also charged the maximum fees if my firm had to clean a toilet, a sink, a bath tub or a refrigerator with specific dollar amounts and I charged a high hourly fee for any other hourly charges. We never had to clean an apartment. That was many years ago.
Today I own my own business supplying various services. I have no clients for which I have not been paid timely. In some instances I am on a retainer. I bill monthly. If not paid within 30 days, I make a call. So far (three years later) being proactive I have not had any issues. Developing relationships goes a long way towards timely payments.
I offer these as ways to be proactive.
Regarding late fees, check out what legally you can do where you are. Different states have different laws. Be proactive. Be assertive. Know your rights and their rights. Follow the law. Apply maximum rates legally. Communicate effectively with customers and let them know you do not want to have to apply these rights to the maximum, but you will if forced to, so please don't force you to do this..
Getting your receivables under control is vital for any business. All of the advise given so far is applicable, but in order to truly manage your receivables I would recommend you take a course in Accounts Receivable to enable you to put together a comprehensive policy that not only deals with late payments but prevents them in the first place.
I agree with those who say you must state a late payment penalty upfront.
Can you put people on an automatic renewal? I don't know if that applies to your business or not.
But, a big thing to keep in mind is this: Paying within 30 days was once considered the 'norm.' Today, payment within 120 days is often considered the 'norm.' Do you know what time frame your competitors' consider a 'late payment'? Keep in mind, too, who pays your customers. If they are funded by government -- well, governments have been known to delay paying vendors for years.
I had this same issue with a few customers. How we solved this issue was we gave a 1% discount to all customers that paid on time we added a 4% charge for any late payments with a minimum of $25 Fee. Only one customer got upset with us called yelling that he would take his business elsewhere. I asked him if his bank charged him a late fee if his mortgage or truck payment were late his response was they are never late to which I followed up with why should we be the exception. He has never been late since.