Hi Lamar, I also have a business that deals with residential customers. I agree with David: if you can't get them to pay on time, then you won't ever be able to collect a penalty, no matter how carefully you spell it out ahead of time.
We require payment at the time of service (they can put it on a credit card). Still, sometimes people aren't there so we call them to remind them that they owe and that we expect to collect the next time. If they aren't there the next time then no service.
I've also been using a company called TransWorld Systems. They are a flat fee collection agency that's very effective (and cost effective) in these types of situations. You can blame the computer (it just does this automatically after x number of days). That way you keep the relationship and you train them to pay or you'll turn them over to collections. Message me privately if you want me to introduce you to my TransWorld representative. They have collected a lot of money for me that I was ready to write off as lost.
It still amazes me that you have to chase people for money. But you do. All businesses do. Best to include it in your process (i.e. no service for customers with outstanding balances, and keep making phone calls to people with outstanding balances). Imposing a penalty sounds enticing, but first of all you'll never actually collect it, second of all it's an icky conversation to have with your customers, and third of all you'll get better results from strong business systems that train your customers and reinforce the behaviors you want.
Let us know how it goes!
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.
If this is for the repeating services like grass cutting for residential customers and you are sending a bill once a month then try two things, pay in advance for a credit and raise your rates for everyone else and for late pays make it $10 after the 20th.
If this is services for commercial customers then 3% but call all your clients first to say a letter is coming and explain the burden this is. You might be paid last because you are the easiest to pay last. Also, dont be so afraid you may lose them as customers if you are upfront about it the ones you want to keep will be fine.
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..
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!
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.
When you consider your cost of money and the time involved in reminders and collections, your late fees should be a lot higher than you think just to break even. During the recession, many of us have been very lenient and have sometimes suffered some major losses as a result. More importantly, we've enabled bad behavior in being thought of as a cheap source of funds by skipping payments. I think the best approach is to make your late fees high enough that you are not a clients cheapest source of funds and, therefore, should be one of the first to get paid. If someone gets more than 60 -90 days behind, you'll know there is cause for concern and can take appropriate action.
How much you can charge is severely limited if the client is retail. In some states the same usury laws do not apply in commercial transactions.
I would have a flat rate late fee across the board from a operational standpoint it will afford you the opportunity to keep track of the late fees more efficiently. The late fee should be a small amount not so small that is does not matter to the client but not so large to turn them away. If you would like to discuss this further or need any assistance regarding merchant services or payment solutions feel free to reach out to me at any time I would be more than happy to provide insight.
A late fee of 1.5% per month is pretty standard when selling to other businesses. We include this provision in our Services Agreement so that our clients are aware of it upfront.
If you are a consumer business (I see you tagged 'lawn business'), consider setting up recurring credit card payments. There are a number of online solutions to help small businesses do this.
The key is creating a roll out plan and appropriately setting the expectations for your customers such that there is an appropriate expectation and no surprises.
What if there were a way to ensure EARLY payments EVERY TIME? Would you do it?
The key is incentivizing early payments.
For existing customers, announce that by X date a new initiative will be instituted at your company where the prices are now being raised by 5-10%. Additionally, there is a PROMOTION, where customers that pay early will receive a 5-10% or a fixed dollar discount (if appropriate).
For new customers, offer your raised price as your base price. Explain the policy about early payments. Any customer desiring the early-price discount, will pay early. Customers that are lazy/disorganized will buy with the intention of paying the early-price and still pay late. You now make an extra commission. Win/Win.
Suggestion Number 2.
Convenience is king. Because you offer a recurring service, offer your clients the early-bird discount and tell them: "What some of my clients like to do to make sure they always qualify for the early-bird discount is to provide me with checks for the next six payments post-dated."
Because these are post-dated checks, you can't cash them early and you save yourself from their fear associated with providing you a credit card number.
For more tips, suggestions, or coaching, feel free to call or shoot me a text at 305 244 3454
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. :)
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.
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.
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.
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.
I suggest your customers would respond better to your giving them a 1 - 1.5% discount for prompt payment. That way you can be fairly confident those who have a decent cash flow will take advantage of it, and the others will not get the discount. They are likely to be having to choose who to pay first, so a strategy of compassionate understanding is likely to be more successful than making their situation worse with penalties. You might want to use friendly reminder cards from a company like Send Out Cards, which allows you to select from a range of cards for this purpose, and they'll mail them out for you with your message and a scanned signature. Of course, you do need the option to hammer them with late fees if they're just messing with you. I used 1.5%/month (backdated to the date they became overdue) and found it quite effective as a last option.
I generally include a 5% late fee in proposals and on all invoices. I put it there mostly as a negotiation point. If someone is late paying, I can give them a call and say, "Hey, I see you guys missed the due date on the last invoice. If you can get that in to me before the end of the week, I can get them to drop the late fee."
I rarely collect the late fee, but most folks are quick to pay when it means they don't have to explain the 5% overrun on an invoice (that would come to about $250 to $1,000 per invoice).
What is reasonable may depend upon the size of your invoices and the common practices in your industry.
Hi Lamar, If you don't already, consider a discount for your seasonal clients if they pay ahead, or have a monthly billing with a guaranteed service. This way your cash flow will improve dramatically and you can avoid some of the late bills. Have you contacted your customers personally about the billing? While this is not fun, it is an effective way to collect while at the same time making sure they are happy with your service. If you are going to institute a late fee, I would make sure that you communicate this very clearly at least one month ahead. Do you take credit cards? This would also be an option to charge the card at the time of service. There are several very easy options for card services that are not too expensive. This would also improve your cash flow. Good luck!
If you have a late payment fee in your customer agreement then you should move forward if the customer is not meeting agreed to payment terms. If not then you will need to do some work with your contacts in the company that you have developed a relationship with. In the future you should set payment terms with late fee schedule negotiated with the customer. Depending upon the industry you are working in this can range from 2-10% on a graduated scale depending upon how late the payment is being made. For example you may have 2% for over 30 days, 5% for over 60 days and 10% over 90 days. You should also remind your clients that the late fee is not a penalty it is to cover your costs of additional billing activity and follow up that would not be required if the customer paid on time in accordance with the terms of the contract.
I would include a note on your invoices that you will charge a 1.5% to 2% per month late fee.
I would also send a generic letter or email stating the reason for the change, don't point finger just explain there have been a lot of late payments and the impact is has on your business.
Most people will understand.