Four Arguments for Charging Late Fees

One of the most important policies you can have in place in your business is for payment; a policy that outlines what you charge, when you bill, when payment is due and how you expect to be paid.

A question you will need to answer when you’re creating your payment policy is whether or not you will charge a late fee on payments that are not paid in a timely fashion. There are a lot of reasons why freelancers and small business owners opt not to do this — to avoid feelings of bad will with clients; it can be difficult to enforce; it can turn off new clients.

For those that do charge a late fee, the reasons are just as significant. Here are four common reasons some freelancers and business owners charge their clients late fees.

It Clarifies the Expectation

Informing new clients of your late fee policy before you begin working together can set the stage for how you expect the invoicing and payment process to work. Of course, all service providers expect to be paid and (most) clients sign on with expectation that they will pay you by certain time. But when you specifically say, “Your payment is due XX days after billing. If it is late, this is what will happen,” you are taking all of the uncertainty out of the equation and making your expectations clear.

It May Only Take One Charge to Hit Home

Late fees are not a good thing from a clients’ perspective. They’re not supposed to be, and they can be a powerful way to show you mean business. The first time a client gets hit with a late fee, especially if the late payment was due to not paying attention to the due date, may be the only time it ever needs to happen for the client to move your bill payment up a bit on his or her list of priorities.

It Makes You Less Resentful

Consistent late payment can be a sign that this client is not a good client for you. But if you have a client that continuously pays you late that you otherwise enjoy working with, charging a late fee can help make you less resentful and less likely to avoid working with the client.

It May Actually Get You Paid On Time

Ultimately, the most powerful argument for charging a late fee is that it can help you get paid on time. It doesn’t always work exactly as you anticipate, but in some cases, all you need is the warning of an additional fee in order to urge clients to pay you on time.

Just a few notes on charging late fees. Make sure you outline the entire process in your contract AND individually discuss it with your clients so they are not automatically hit with a fee when their payment is a day late. You may even want to institute a warning process that builds up to an eventual charge, instead of whacking them right out of the gate.

Keep in mind that some locations have limits on how much you can charge in late fees, so be sure to check local laws or consult with a professional before adopting a late fee policy.

Do you use late fees in your business to encourage timely payment? Does it work?

Image credit: jeinny

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  • NetNerd85

    Late payments rarely happen because the client just doesn’t want to pay. There are reasons why. Have you ever paid a bill late? chances are because you didn’t have the money. A better policy to have is human compassion instead of hostility. When people can’t pay bills, they get stressed because they have no money. Threatening people with even more debit is the worst thing you can do. Period. You need to talk to your client, yeah that takes effort I know, especially if they are dodgying your call because they just don’t want to be yelled at for not paying.

    If you show compassion, you know be human for a second and not a money thirsty business person that’s colder than ice. You do wonders for the client relationship. Obviously you have to handle the situation firmly but with compassion not an “or else” attitude. You need to get paid and they need to pay. But if they can’t pay all the money at once then go to installments. Any money is better than none and is often easier to get.

    I will never charge late fees. I don’t want to be charged them myself and I have compassion for people in tough situations.

    Late fees don’t help at all, it just makes you look like a jerk.

    • http://www.optimalworks.net/ Craig Buckler

      In my experience, the smaller companies are generally very good at paying on time. Larger organizations are another matter — and it’s not because cash flow was a problem. It’s also more difficult to apply late fees because they’ll simply ignore them. Show compassion if you like, but it’ll make no difference!

    • http://www.brothercake.com/ James Edwards

      I completely agree with NetNerd85. IMHO it is the height of arrogance to charge late-fees; companies who do this are sending out a message that they have you over a barrel, so to speak, that you must do things their way “or else”. It’s exactly the kind of attitude that makes people hate large companies like BT or British Gas.

      Speaking as a contractor, I would never be so rude. Speaking as a client, I would never accept it — it would be a deal-breaker for me. The contractor I was dealing with may take that as a sign that I’m an unreliable payer – but I’m not, I’m just militant about my ethics. I simply would not accept it, and the contractor in question would lose my business because of it.

      • W2ttsy

        I guess next time youre at the supermarket and you don’t feel like paying them on time (ie then) you wont expect them to stop you at the door?

        Come on, its this magic entitlement people seem to create where they dont have to pay a service industry on time. Im sorry, but late fees or other penalties get doled out for credit cards, gas bills, traffic fines and plenty of other industries, so its only fair that your clients cop them too.

        If it was a “surprise late fee” type setup, then yes it would be a bit hostile, but clearly laid out terms from the get go will remove that. If your client doesnt understand simple business operations like paying a bill or collecting a late fee, then you need to address your client base more thoroughly.

        Theres no need to remove the compassion either, perhaps you’d benefit from a 30 day warning or creating a payment plan arrangement if they ring up and explain things (like banks do).

        No one has a client over the barrel with fees. If a client knows they cant pay, then they are a fool for signing in the first place. Did the economic implosion from over leveraged mortgages not teach you anything?

  • http://www.reich-consulting.net/userproof/ coffee_ninja

    I work for a lot of small business, most of which are just barely getting by in this economy like me. They ALWAYS pay on time.

    But I have one client who consistently pays 3 to 4 months late and they happen to be the one client that has been incredibly successful. I have a very difficult time driving up their quarter mile paved driveway, past the stable that houses their Arabian horses and walking through their kitchen with the imported Italian stone to work on their computer, knowing I could easily lapse on my mortgage and be homeless by the time that they pay me.

    Whoever said late payments breed resentment wasn’t kidding!

  • NetNerd85

    @W2ttsy, if you sign up clients that don’t feel like paying then you’ve failed to some degree to do your job of providing quality work (in the clients eyes, not yours) or signed up someone dodgy (always trust the force, or your spidey sense).

    My energy company sends out a late bill that says “we know you normally pay your bill on time and we understand…” blah blah, now that is compassion in template form. It’s not a letter with a big thick red box around the overdue amount. It’s a friendly reminder that you need to pay your bill and they are there to offer their services to help you pay your bill.

    If anything it makes you feel guilty for not paying on time, not hostility. I’d rather clients feel they owe me money than pissed off that I demanded money. Where’s the love!

    • W2ttsy

      In regards to your energy bill, its almost a reward for being loyal and paying your bill on time. A new customer might not be given the same chances and its important that they be put in their place straight away.

      Unfortunately, not every business is a straight shooter, and you need to have some serious recourse implied when they sign on otherwise you will get walked all over. The last thing you want to find (and alot of start ups do) is that your client bails on you at 95% of the project completion. If there is a 10% late fee per 30 days, then a threat of court action, then you watch them stop welching on payments.

      Just look at the ton of threads in the Business and Legal section of the SP forums and you will see that there are plenty of people getting shafted when it comes to paying the bills.

      Also, not feeling like paying and not paying due to QA concerns are two completely different things. If I was to deliver sub standard work, then I would be responsible if the client pulls the plug on the money, but for a client to sign up knowing they cant actually pay, or decide they’d rather not and somehow rip off your product, then those are things that are out of your control to a certain degree. Due diligence can only take you so far after all.