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When and How to Charge Late Fees on Unpaid Invoices [ULTIMATE GUIDE]

Many businesses today are struggling with unpaid invoices. Studies show about 43% of business contractors are struggling to get payment on outstanding invoices. Business owners who are unable to collect money owed to them have been forced to close and shift attention to other things, with some of left with huge debts to clear.

This worrying trend has triggered some governments to take action to clampdown late payment. Here are some of the solutions governments are proposing:

  • Promoting the use of innovative technologies, including invoicing software.
  • Enabling trade bodies to underscore the best and worst practice.
  • Big companies to appoint a non-executive director to ensure on-time payments.

But what can you do on your part to address outstanding invoices or stop them from ever happening? There is one excellent way to deal with this, impose late fees.

But how do you go about penalizing for late payments without scaring away your customers?

Below are ideas on how you can impose a late payment fee for invoices in a professional manner.

It is a common practice

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Many businesses charge a late fee for late payments, and this has helped them lower the cases of unpaid invoices. You will not be the first business owner to impose a late fee. When you charge, make sure you don’t slap your customers with a huge fee. 

If not sure of the fee to impose, consider reviewing the best practices of other businesses. In a nutshell, never feel unformattable to charge a late fee for outstanding invoices.

It is legal to charge a late fee

Is it legal to impose a late fee? Yes, it is perfectly legal if you don’t go overboard. Just make sure to follow the various guidelines on late fees to avoid rubbing relevant authorities the wrong way. Basically, consider imposing a reasonable and late fee.

To avoid finding yourself in courts defending your late fee, make sure to notify your customers about the fee. Equally, make it clear to them what happens if they don’t pay the fee.

Benefits of charging late fees for invoice payments

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Why charge a late fee? Here is why it is crucial to impose:

Why some customers pay late

There are many possible reasons why some customers pay late. Hard economic times, loss of job, illness, and hacked accounts are some of the possible reasons. Some of these situations may require you to show a little mercy; that is why it vital to reach out and find out the real cause of late payment.

Excellent communication helps nurture a good relationship and work out on a plan that suits both parties. So never rush to make conclusions as to why customers are not paying unpaid invoices without reaching out.

The only time it is ok to take action is when you notice a recurring behavior from specific clients. It is unhealthy to be in business with clients who don’t take your business seriously.

Make sure you are not the reason why some customers are paying late. For example, consider a scenario where your payment systems are not working. So before reminding your customers to pay, make sure everything on your side is ok.

When to charge a late fee

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Never rush to charge a late fee if it is not specified in the original agreement. Doing so is unprofessional and is going to hurt the good image you have built.

A contract that specifies late fee amount eliminates situations where your customers will express dissatisfaction. Such a contract outline when to impose the fee, the percentage, and let your customers know in advance what to expect if they fail to pay on time.

Taking time to look over a situation before enforcing a late fee is also a good idea. Why? For example, consider a scenario where your services or products were below standards. In such a scenario, customers can delay making payments. Accessing the situation can help you work out a plan that is suitable for you instead of enforcing a late fee.

Basically, there are many things to consider before enforcing a late fee. Having a contract outlining the late fees makes it easier for you to act on time and in a professional way. Just remember to enforce a reasonable fee to avoid hurting customer acquisition and retention.

How much should the late fee be?

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Before setting your fee rate, first, find out the maximum you can charge in your area. Find what other companies are charging, especially those in your industry. That way, you will not go overboard. While setting your rate, remember to keep the following in mind:

How to enforce late payment fees

You know the fee to charge, and you have set the terms and conditions to guide you, what next? Enforce late payment fees.

Now, since you have already outlined the late fee terms in the agreement, you shouldn’t be worried when enforcing. Here is how to go about enforcing late payment fees:

  • Send payment reminders before the due date: This is a good way to remind busy customers of unpaid invoices. Make sure to send a professional reminder. Your reminder must include a subject line with the invoice number and amount.
  • Once the due date passes: In this case, also send a reminder that has the invoice number, amount, courteous body, late fee charge, and the due date. Remember also to inquire about the invoice payment. Additionally, add a link or attachment of the invoice.

Conclusion

Dealing with late-paying customers it is not a simple task. It even gets harder if you don’t have policies in place to boost timely payments. The above tips will help you develop and fortify your late payment policies.