Late payment is a persistent problem for small businesses, and that’s before we even start to take into account the challenges of the coronavirus pandemic.
Even in a normal economic and operational climate, 83% of small businesses in the UK have had payments made after their due date, with a further 78% of those having to wait more than a month after the agreed terms to see any money.
One way to deal with late payments, is to charge a late payment fee – but it’s a tricky one and there are several things to weigh up before you consider it.
Late payment fees – the benefits
First of all, let’s explore the positives of using a late fee policy on your invoices:
Getting paid on time
In tough times, cash flow is especially important. Late payment fees can be an added inducement to get clients to pay you on time, or at least communicate with you if they are not going to be able to pay your invoice within the agreed terms.
Jumping the queue
The chances are, if a client isn’t paying your invoices on time, they are doing the same to other suppliers. If you have stricter payment policies and kick up a fuss, they’ll move your payment to the top of the pile.
Having a late fee policy establishes that you mean business! Clients are not only incentivised to pay on time but also will be less inclined to repeat late payment behaviour.
Late payment fee guidelines
Before deciding whether it is appropriate to charge a late payment fee, ask yourself the following questions:
1. Why is the payment late?
Some clients won’t pay, because, quite frankly, they are just bad clients. Disregarding those, there are usually two other reasons why a client is withholding payment. Either they have cash flow issues within their own business, or they may not have been 100% satisfied with the work carried out.
In both these cases, it is important to keep the lines of communication open. Invoking a late payment fee should be a last resort, it is far better to talk to the client, establish the problem and come to a mutually agreeable solution.
2. Are they aware of the fee?
The last thing you want to do is burn bridges with clients. If you are going to include payment fees, first you have to manage expectations by:
- Specifying the fee early on in the relationship, ideally in your contract for services
- Stating it clearly on all your invoices.
Even if you haven’t already specified it as above, you can still introduce late payment fees. Just inform the client in advance, saying that, for example, from next month you will be applying a late payment fee policy on all of your invoices.
3. Is a softer touch more appropriate?
Just because you have a late payment fee policy doesn’t mean you have to enforce it at all times. For example, even a reliable client may be going through a difficult time personally, or their business may be in trouble.
By showing empathy and waiving the fee, you can strengthen your relationship with them, and this makes good business sense in the long run. Besides good business practice, it pays to be human.
Deciding how much to charge
Having made the decision to charge a late payment fee on unpaid invoices, the next question which arises is how much to charge.
It is important to remember that the late payment fee is there to motivate timely payment and not as an additional revenue stream.
The fee you charge (not including any interest on the outstanding invoice amount), should be sufficient enough for people to act, but not so exorbitant as to sour the relationship, especially if the payment is only a few days late.
Why take the risk? You’ve got Penny
As you can see, the decision to charge late payment fees is a very delicate balance.
As a Penny user, you may not ever have to worry about it! If you opt to advance your invoice payment with Penny, we’ll pay you between 91% and 99% of your invoice, within 24 hours.
We do all of the admin and credit control, and your client pays us on their normal terms. If they pay late, it is down to us to chase the invoice payment, and we’ll always be friendly and professional in how we do this. What’s more, we carry debt protection insurance so there is never any liability on you.