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Charging Late Payment Fees for Outstanding Invoices

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As a business owner you must understand how cash flow affects your business. Successful businesses are the ones who can keep money coming in the door in a timely fashion. That ensures they can meet their obligations. If customers aren't paying their bills timely, that alone can interrupt the flow of a business. 

To help motivate customers to pay their invoices on time, you should consider charging late fees on payments made outside of your "terms and conditions." The following article will focus on educating you about the process of charging late fees to late-paying customers. 

How to Handle Late Payments and Unpaid Invoices

As a provider of goods or services, you have a right to get paid for what your business provides. It's a tradition. Your company provides the goods or services, and your customers pay for those goods and services. Unfortunately, there will be times when things don't flow as they should. 

As a business owner, you have the right to expect timely payments from your customers. After all, your vendors and employees expect timely payments from your business. When invoice payments are late, it will cause your company problems. These are problems that could escalate as your customers fall further behind. 

You always have the option of constantly calling your customers and requesting the payment of late invoices. Unfortunately, that seldom works with customers who don't have the motivation to make payments. They won't do it until they are ready and or willing to do so. 

The best tool you have to motivate customers to make timely payments is to charge them late fees. Implementing late payment fees in your terms and conditions is common practice in most business environments. Consequences for outstanding invoices should motivate more clients to make payments on time.

Here's the good news. Should a dispute with a customer over invoice payments ever end up in court, the court will allow your business to pursue any late charges added if the customer is aware of them. 

The Benefits of Charging a Late Payment Fee

There are many ways your business will benefit from charging late payment fees. However, three primary benefits stand out.

First, it does serve as proper motivation for customers to start acting more responsibly. 

Second, the extra compensation will help offset any "cost of borrowing" your business might incur because of cash flow shortfalls. These would be shortfalls created by late-paying customers. 

Finally, it's good to have another source of revenue for the business. To the extent your business might not have to borrow to cover shortfalls, late payment fees are a perfect solution.

When to Charge a Late Payment Fee

It takes a lot of finesse to start charging customers late fees without offending or upsetting them. Before your company charges any customer a late payment fee, there should be procedures in place that dictate the process. 

First and foremost, you can only charge late fees if your business has the right to do so. That right is established through a clear expression of how, when, and why your business will levy late charges. You can express this information in a contract or listing the terms and conditions clearly on invoices.

The other point you might want to consider is individually reviewing each instance of late payment. Charging late fees should not necessarily be an automatic occurrence. There will be circumstances under which one of your customers has a viable reason for making late payments. 

Sometimes, the best practice is to try to work with customers who are struggling financially, which would be especially true with long-standing customers that have good track records of paying. It doesn't hurt to make customer inquiries before acting with late fees.

How Much to Charge

There are no hard and fast rules about setting late fee charges. However, every businesses owner should find a balance which benefits you and your client. In this case, the late payment fees should be high enough to motivate customers to pay without being so high as to offend them. 

Before you set anything in stone, you should look at what other companies in your industry are doing. Setting fair and competitive late fees is a good business practice. 

How much? The most common amounts seem to be around 1.5% to 2.0% of the invoice amount for every 30 days the invoice is past due. The past due date should not start until a "grace period" has been surpassed.

How to Avoid Late Payments and Unpaid Invoices

Late fees can create accounting issues and hard feelings for customers. With these things in mind, you should consider the following steps to avoid late payments:

  • Making sure all terms and conditions are clear
  • Sending customers reminders before the due date elapses
  • Making courtesy calls before assessing late charges
  • Offer discounts for invoices paid early or by the due date

Never be concerned about charging late fees on unpaid invoices. It is a common practice in most industries. As a business owner, it's your responsibility to keep your business financially sound and secure. Getting compensation in the form of late fees is one option you have to address what could turn out to be trying circumstances.

The Invoicer app is an excellent resource for handling the processing of your company's outgoing invoices. The app allows you to implement late fees and customize your payment terms. Other features include timed notifications, recording of payments, and the production of "aging reports."

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