Late fees to clients: To charge or not to charge?
It’s never easy to hunt down your clients to get paid for the work you have done. It is financially damaging and psychologically burdensome. This is the late fee’s cue to enter the scene. But do you know which is the typical late fee for invoices and when to use it? Or how much can you charge for late fees?
So far, we have explored the different kinds of extra fees and have dived into the right way to invoice. Thus, it’s about time that we answered the question “Should you charge late fees on outstanding invoices?”. Of course, the response is not definite. It encompasses some other critical sub-questions we need to answer first. Each project is unique, each client is different, and each time period has its challenges, like the one we’re going through right now. Depending on how you reply to the questions in this article, you will be able to decide when to implement late fees.
What is the story about late fees?
First and foremost, this kind of fee is a particularly common practice in the business world. A late fee can be described as an added cost attributed to the client due to their liability for any payment delay. Unsettled invoices create a significant problem in today’s business market for freelancers and companies of all sizes. Many corporations dedicate specific departments to guarantee that clients pay for their products and services in good time.
For freelancers and SMBs, tracking payments and following up with clients regarding outstanding invoices is a time-consuming task. Therefore, the use of an invoicing and billing software like Elorus will notify you about upcoming due and overdue invoices. You can always schedule reminders to be sent to you, your team and most importantly, your clients. Let’s not forget that through Elorus, you can also send notifications to clients with an amount due or overdue.
Why should you charge late fees?
Late payment fees on invoices mean extra costs for your clients. Naturally, there is a variety of client behaviors in the business market. They could either not care about paying more or conform to the due date stated on the invoice to avoid paying extra money.
Mostly, late fees aim at prompting the clients to pay off their debts. Thus, they should be described explicitly in the contract’s payment terms and conditions. A client that does not pay attention to the agreement and does not pay on time; will still have to settle the payment plus the late fee.
This fee does not have only money-related advantages. It also influences your professional status greatly. It concretizes your integrity and showcases that reliable and punctual financial transactions mean good business relations.
More rigorous payment terms can bring about a more consistent incoming cash flow. Your approach towards outstanding payments can affect the way your clients pay your invoices. More specifically, if a bad paying client has 6 different independent contractors working on different projects for them, then the one with the strictest rules on their contract agreement will more likely get paid faster.
When should you avoid charging late fees?
Depending on your clientele, you, as a freelancer, know what kind of rules and regulations apply to them. Do not exclude late fees from your contracts but try to offer incentives to your clients in order to pay much earlier than the due date. You would rather have clients appreciating your offers than being terrified of your penalty fees. Naturally, both tactics are acceptable and equally effective in different cases.
Compassion over punctuality
There are some occasions that you should reconsider charging late fees. Some clients are bad payers. However, other clients don’t have the capacity to pay you because of economic problems, personal or health issues. In this case, you can dismiss the fee and provide the option of installments as long as they come to you about their current state and ask for your flexibility and understanding. You could also give them extra time if the option of installments is not helpful enough. If you show understanding in times of need, you will manage to keep your client base intact and your conscience clean.
Project issues, payment issues
There is a specific group of clients that have an entirely different reason behind their denial or delay to pay. They are dissatisfied with your services, the outcome of the project or other aspects of your work (unprofessional behavior, project or submission delay). If any of these reasons are valid, you have to go through self-evaluation to acknowledge mistakes or shortcomings in your working method. In this case, a late fee would be recommended since the initial quote was not honored.
No agreed fee, no applied fee
Moreover, the omission of including a late fee in the agreement is also a case where you should maybe reconsider charging any unmentioned fees. If your clients are unaware of any fees, then it would not seem fair or promote good business relations to apply them.
However, if the payment is overdue for more than a specific period that you’re comfortable with, you can notify your client that a late fee will be applied to their invoice.
Which is the typical late fee for invoices?
Each situation is different, but generally, the late payment fees on invoices do not have to be extremely big, The most typical late fee for invoices is at 1.5% interest for each month that the client has not settled their debts. The late fee rate needs to be motivating enough for your clients to stop wasting your time and their money.
However, you can set your own rate for late fees. At this point, we’ll provide you with an example in order to help you understand the interest fee calculations you need to do. First, you need to know what the maximum interest rate in your state is according to the current usury laws.
So, let’s say that you live in Kansas, and the annual interest rate cannot exceed 15%. You choose to apply 10% interest to your invoices. The total amount of an invoice is $1500, overdue for 30 days.
The steps you will be following are:
- Divide the 10% annual rate by 365 days of the year. 10/365=0.027
- Then, turn the daily interest rate of 0.027 to the numerical 0.00027 and multiply it with the total amount of days overdue. 0.00027*30= 0.0081
- Multiply 0.0081 with the total due invoice amount to get the total late fee. 0.0081*1500= $12.15
- Add $12.15 to the actual invoiced amount. 12.15+1500= $1512.15
What about late fee wording in invoices?
Apart from knowing the typical late fees for invoices, you actually need to make it crystal clear that you charge extra when not being paid on time. So, in order to be sure that clients will fulfill their part of the deal, you need to be careful with your late fee invoice wording. This applies both in the initial agreement but also in the subsequent emails regarding the possible outstanding invoices. The better you phrase the imposition of late fees, the easier it will be for your clients to understand and take it into consideration.
Here are some ways that you can state the addition of late fees in the invoice amounts:
“As agreed in the initial contract, if the respective invoice is not paid until the due date (or within the X days that you have agreed upon), there will be an added late fee of x % per each month that the amount remains unpaid.”
“Payments that have not been made within the set payment period will incur an additional percentage of x as a late fee for every month that the amount due has not been settled.”
Charging late payment fees on invoices is your professional right when payments are settled on time. Judging when and why you should apply a late fee to an invoice is your professional responsibility. So, you need to Especially in difficult times like this, you should take into consideration many factors to decide what to charge or not. Above all, you should have your own payment terms and late payment policy and adhere to it in order to solidify your business integrity in the eyes of your clients.