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Should a Business Charge Late Fees or Interest Charges?

Extending credit is a way to give a few extra days/weeks to your clients to make payment after the service has been provided or a product is delivered. Everyone likes to get paid right away, but for small businesses, this is often a necessity.

The next big challenge is what to do if the payment has not been released by the client after the due date. Should you impose Late Fees, Interest Charges, something similar to what credit card companies do.

FEAR: Late fine may aggravate the client, potentially resulting in loss of business is the greatest fear. Late fees must be implemented with proper care and planning.

Imposing a late fine is a legitimate approach; it is a powerful way to show you mean business. It imposes a small well deserved fine for being irresponsible or not keeping their promise to pay on time. After all, money does not come for free. If you were to take a loan from your bank, they would have charged interest on it. Similarly, if you have a Credit Card and do not pay on time, they charge a Late Fee after the due date.

There are several genuine benefits of imposing late fees

1. Late Fees is a Fairly Standard Policy in Contracts

Having a proper well-written credit policy in place enhances the reputation of your business because it indicates that the commitment to making timely payments must be taken quite seriously. When the contract is signed initially no one anticipates that there will be occurrences when the payment is overdue. This is the best time to slip in your Late Fees in your credit policy. Late Fee is a minor clause when business contracts are being signed, and is a universally accepted procedure.

However, if it not included during the initial signing of the contract, it is nearly impossible to slip in your credit policy later. For Example: If your credit card company includes a Late Fees clause in their contract, you are already prepared for it.

2. Get Paid on time

Everyone hates paying late fees. It pressurizes your customer to make a payment on time. They will mark the payment due date on their calendars, and try their best to avoid paying any late fees.

3. Be the first to get paid

If your client has to make payments to several businesses like yours, whose bill do you think they will clear first – The one who charges late fees OR the one who does not?

If your client is struggling with making promised payments, you never know how bad their current financial is now and how much worse it can get soon. It is better to be in front of the line.

4. Late fee is well-deserved compensation

Once payment is not made on time, your staff has to take additional measures to recover money. This could be in the form of reminder calls or sending invoices again. Extra work by your staff means additional expense for you.

You are simply charging the client for the extra effort and cost that you have to incur to recover your money. Any extra time spent by your staff is overhead, this time could have been utilized in a more productive way.

5. Waiving off Late Fee has benefits too

If a client is unhappy that you have imposed late fees, it is completely fine to waive it off a few times. You are doing a favor on the client, which he will remember and will take it very positively. Next time he will remember the due date, to avoid the shame of asking you again for the waiver of late fees.

Won’t you feel very positive about a credit card company that waives off late fees after listening to your genuine explanation?

6. Every bit counts

Late fees can improve your cash flow, bottom line and profitability. This also reduces your number of overdue accounts receivable.

7. It puts a number out there

If you have a late fee policy in your contract, it clarifies your expectation. The client would exactly know how much extra money they need to allocate to cover the late fees. You may not even have to talk to them about it. Maybe the client does not have any cash flow problem, and they just forgot to make the payment on time because their account was out on vacation.

So look beyond just the core late fees aspect, there are so many other business benefits of it.

Additionally, add to your contract that if a payment is over 90 days overdue the account can be forwarded to a Collections Agency.

Check with your attorney before setting your late fees. Rules and regulations around these change from state to state.

 

Filed Under: Debt Recovery

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