If you're looking for a way to speed up the process of getting paid by your overdue customers, applying late payment fees is a great option.
In this article, we'll discuss how late payment fees work and give some examples of late fee amounts that you can use for your unpaid invoices.
We'll also talk about how to charge interest on overdue accounts, and provide some tips on collecting late invoice payments.
What are late payment fees?
Late payment fees are a way to encourage customers to pay their bills on time.
The late fee is a fixed amount of money that is charged to the customer for each day that the bill is late.
This fee can be applied in addition to the interest fees that are charged on past due invoices.
The fees can help the business owner to cover the costs of late invoices, which can be a huge problem for small and mid-sized businesses on a truly international scale.
Unpaid invoice facts and what to do
In the U.S, 53% fewer invoices issued in 2020 were paid on or before the payment due date, compared to 2019. In Europe, the number of invoices that are ten days overdue has risen by 70% over the last year.
These statistics paint a worrying picture of the global culture of late payments, and it's clear that something needs to be done in order to combat this issue.
A late fee for past due invoices can help to offset some of the costs that are associated with late payments, and they can also incentivize customers to pay their invoices on time.
You can also apply a late fee in different ways, depending on how overdue the invoice is.
For example, you could charge a late payment fee as soon as an invoice becomes overdue, or after a grace period past the due date.
Or you could increase the late fee when the invoice payment becomes more overdue.
In addition to late fees, you can also charge interest on an unpaid invoice.
This can help to offset some of the costs that are associated with late payments, and it can also encourage clients to submit payment on or before the payment deadline.
You can charge an interest rate at a flat fee, or you could tie the late fee percentage to the prime rate or another benchmark interest rate.
Either way, it's important to be clear about your payment terms and late fee policy in your terms and conditions, so that there are no surprises for customers.
How much to charge in late fees on invoices
How you calculate late fees will depend on the country in which your business operates. You can use this late fee calculator with an adjustable annual interest rate to calculate the late fees you can charge to customers.
In the United States, there is no statutory late payment fee, but businesses can charge a reasonable late fee for late payments.
The Federal Trade Commission (FTC) recommends charging interest on overdue accounts at a rate of 8% plus a reasonable charge that covers the costs of recovery, with the only caveat being that customers must be made aware of all late payment fees in advance.
So how much should you charge for late fees on overdue payments? There are a number of late fee examples that businesses can use as a guide when putting together their late payment policy.
Charge a percentage of the invoice or fixed amounts
One option is to charge a percentage of the invoice total, such as 0.25%, 0.50%, or even up to one per cent. You'll need to spend time calculating percentages, but if it helps you get immediate payment on an overdue invoice, then it'll be worth it. Another option is to charge a fixed amount; a typical late fee, such as $25 or $50 per 30-days that the invoice goes unpaid, can help you to get paid faster and help push you towards steady cash flow.
For example, an invoice is for $500. The late fee would be $12.50, or 0.025% of the invoice total. Added to that would be a compensation fee to recoup the time put into chasing the invoice of $50, for $62.50 in total.
Standard late fee in Australia
In Australia, the late fee is typically around 0.35-0.50% of the invoice value, but it can be higher or lower depending on the business. The typical recovery fee is around AU$50
For example, if an invoice is for AU$100, the late fee would be between AU$0.35 and AU$0.50, added to a recovery cost of AU$50 for a total cost of AU$50.35/.50.
Standard late fee in Canada
In Canada, late fee is usually a percentage of the outstanding balance, and range from 0.25% to as high as 12%, with a typical recovery fee of around CAD$50.
For example, if an invoice is for CAD$100, and the late payment fee is set at 0.50%, the late payment fee would be $0.50 added to a recovery fee of CAD$50 for a total of CAD$50.50.
These fees can be applied once the invoice becomes late by 30 days or more of the original contract terms.
How to implement late fees on invoices in your receivables process
When it comes to implementing late fees for overdue payments, the first step is to write them into your credit control policy and payment terms. This will ensure that late fees on invoices are applied; you should charge late fees to all customers, except, in some cases, customers that you have a long-standing relationship with, normally pay their invoices by the due date, and who have never had overdue balances before.
Because there is no statutory minimum in the U.S, as there is in Europe and the UK, companies baed there are allowed to set their own late payment penalties for late invoices but are obliged to inform the customer of them in their payment terms.
Notifying your clients of your late payment policy in advance is a must, as is being clear about the late fees you are charging. This will help to avoid any disputes or confusion further down the line.
If you do not have a late payment fee structure already written into your payment policies, we recommend adding one, sending the updated policy out to your customers, and then charging late fees on invoices issued from that point forward.
Managing your late fee policy
Ideally, you'll want each of your clients to agree in writing, as this will lessen the chances of late fees being disputed. We do not recommend trying to charge fees on a retroactive basis.
The next step is to create a late payment fee invoice template. This will help you speed up the process of applying late fees, and make it easy for customers to understand why they're being charged.
Using a template ensures that staff apply late fees at the appropriate point, in a unilateral manner, and that late fees are applied consistently.
When it comes to team alignment, it's always best to make sure your late payment structure is added to your credit control policy and all staff members are made aware of it.
To ensure late fees are being applied consistently, consider adding late payment fees to your accounts receivables' KPIs for your team.
Should you charge late payment fees on overdue invoices
Now that we've covered when and how to apply late fees for unpaid invoices, let's talk about if you should be applying them in the first place.
The simple answer is yes, you should always charge late fees on overdue invoices to cover your costs and time incurred from chasing payments. A prompt payment isn't just convenient; it also helps you to stay in charge of your cash flow, which can be critical for businesses.
But there are a few things you need to take into account before deciding to charge late payment fees to unpaid invoices.
The pros and cons
While late fees are an excellent way of convincing late payers to make good on their invoices, they are not without their pros and cons, including:
Pros
- Late fees act as a deterrent to late payers, encouraging them to pay their invoices on time
- Late fees can help offset the costs you incur from chasing payments, such as administrative and legal action costs.
Cons
- Deciding to charge late fees may change your payment fee structure, which may damage the relationships you've built with your customers.
- As with all administrative efforts, there is an associated cost in time and resources needed to charge late fees and enforce your late payment process for a past due invoice.
At the end of the day, whether the pros outweigh the cons is going to depend on your business and the financial situation you find yourself in.
If you are regularly dealing with customers being late on payments, and methods such as early payment discounts, requesting down payments, offering multiple payment options, or payment installment plans have been unsuccessful, charging late fees may be the only way to offset costs and encourage better behavior.
It's better to have a late fee policy in place for when a customer's payment due date comes and goes, rather than having to eventually end up in a small claims court all because of a late invoice.
Categorizing your customers
One of the ways of getting around some of the cons associated with late fees is to not apply them with a wide brush. If you categorise your customers by their payment behaviour, you can tailor the past due invoice fee to reflect that.
Customers who are always late on payments and always seem to have an overdue invoice may incur a higher late payment fee than those who usually pay on time.
Customers with whom you have long-standing relationships and who always make timely payments may be exempt from late fees altogether. If they never need payment reminders and always pay by the due date, then you can leave invoice late fee wording off the original invoice.
This way, there is an incentive for all customers to make payments on time, while recognising that late payments will happen from time to time and not harming the relationship with your best customers.
Easing the burden of late payments
Used judiciously, late fees can be a helpful way of easing the burden of late payments and help you get paid faster.
The best way to use a late fee in a way that is fair and reasonable, and that takes into account the customer's relationship with your company.
Adding a fee to overdue invoices and payment reminders can help to motivate customers to pay their bills on time, and can provide some much-needed revenue for your business.
To reduce late payments and avoid charging fees to overdue customers, try automating your accounts receivables process.
Chaser provides receivables automation software that lets you save time whilst keeping the human touch with your customers - try it for free, for 10 days.
Late fee FAQ
How to charge late fees on invoices?
Knowing how to charge late fees on invoices is key when charging a late fee for an invoice that's past its due date. There are several ways to charge a late fee.
One is to charge a fixed amount, which may include a set charge plus a service fee for processing the late fee.
Another option is to charge a percentage of the overall invoice; in the United States, a late fee calculated in this way is typically 8% plus a reasonable late payment fee.
Why is it important to charge a late fee?
There's no problem if the initial invoice is paid on time. But if your customers consistently pay invoices late, then you may find that you run into cash flow problems.
And that can result in your business being on its own payment plan for supplies because of unpaid bills. Including late fee wording on the original invoice can help encourage prompt payment, ensuring your money owed is in your bank account as soon as possible.
How to avoid charging a late fee?
No business wants to charge for late fees. The best way to avoid this issue is to take proactive steps that make it as easy as possible for clients to pay the original invoice.
For example, you should use a professional invoice template to get the clients attention, and send invoices promptly. You should also include a late payment policy on the invoice, to ensure your clients know the consequences of failing to make minimum payments.
Offering a variety of payment options and keeping track of unpaid bills with invoicing software can all help, too.
