Extending credit is a way to give few extra days/weeks to your clients to make payment after the service has been provided or a product has been 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 a Late Fees, something similar to what credit card companies do.
FEAR: Late fine may aggravate the client, potentially resulting 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 bank, they would have charged an interest on it. Similarly, if you have a Credit Card and no not pay on time, they charge a Late Fees after the due date.
There are several genuine benefits of imposing a late fees
1. This is a Fairly Standard Policy:
Having a proper well written credit policy in place enhances the reputation of your business because as it indicates that the commitment of 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 will be overdue. This is the best time to slip in your Late Fees in your credit policy. Late Fees is a very minor clause when business contracts are being signed and is a universally accepted procedure.
However if it not included during the initial signing of 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 a customer to make 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 the front of the line.
4. Late fees is well deserved compensation:
Once a payment is not made on time, your staff has to take additional measures to recover money. This could be in form of reminder calls or sending invoices again. This means additional expense for you.
You are simply charging client for the extra effort and cost that you have to incur to recover your money. Any extra time spent by your staff is an overhead, this time could have been utilized in a more productive way.
5. Waiving off Late Fees has benefits too:
If client is unhappy that you have imposed a late fees, its 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 a late fees waiver.
Won’t you feel very positive about a credit card company who waives off late fees after listening to your genuine explanation.
7. It puts a number:
If you have a late fees 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. May be the client does not have any cash flow problem and they just forgot to make payment on time because their account was out on a 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 over due 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.