The dreaded late fee. Loved if you’re the one charging and collecting them, hated if you’re the one paying them. But a late fee is a late fee right? Wrong. Whilst the concept itself is fine and we actively encourage the use of them, it is vital you do it the right way.
Do’s:
– Have a written agreement with your customer which covers the late fees. Without one, you technically cannot charge them. Simply having a clause on your invoice isn’t enough. T’s and C’s on your website or quote are fine as long as the customer agrees to them in writing. An email or SMS indicating they understand and accept is all you need. Better yet, an acceptance of your quote through Xero or MYOB is optimal.
– Ensure the late fee is appropriate and commensurate. $50 per month is fine. $300 per month is not. Remember, the late fee serves a dual purpose- it’s an incentive for them to pay on time and a penalty for them paying late. Charging them $300 on a $150 invoice is a guarantee they will never, ever use you again. And if you think this doesn’t happen, trust us, it does. We will always decline to collect a late fee that is more than what was originally owed.
– Timing is everything. Charging a late fee after only 7 days is very harsh. 21-30 days is better.
– Give the customer plenty of notice. It should be mentioned in your 1st and 2nd reminders (7 and 14 days past due ideally) and charged around day 21-30. Like any consequence, the mere threat of it is often just as effective.
– Be flexible with waiving the late fee. Yes, it’s annoying being paid late and yes, you probably should be compensated for having to chase them up. But always be thinking of the bigger picture- waiving a $50 late fee if they apologise and had a genuine excuse for paying late is much better than being punitive and unreasonable, especially if you’re trying to build your business.
Dont’s:
– Think of them as a revenue stream. They aren’t. A late fee is just to compensate you for admin work. The moment you start charging as much as you can get away with is the moment your customers will abandon you like the plague.
– Feel bad charging them. Provided the amount is reasonable, the customer agreed in writing and you’ve given them ample warning, then they’ve got no one else to blame but themselves.
– Underestimate how effective they can be. Getting paid an extra $50 is great but the best thing about having late fees is the ongoing benefit- the customer’s increased diligence. I got charged a $50 late fee once and I still kick myself. $50 down the drain with nothing to show for it. But will I ever allow it to happen again? Never.
Cheers guys
Late fees- Do’s and Don’ts