How to apply late payment fees to overdue invoices

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.

We'll also talk about how to charge interest on overdue accounts, and provide some tips on collecting late payments.

What are late payment fees?

Late payment fees are a way to encourage customers to pay their bills on time.

The late payment 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 that is charged on overdue accounts.

Late payment fees can help your business to cover the costs of late payments, which can be a huge problem for small and mid-sized businesses on a truly international scale.

In the U.S, 53% fewer invoices issued in 2020 were paid on time, 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.

Late payment fees 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 late payment fees 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 certain number of days past the due date.

Or you could increase the late payment fee as the invoice becomes more overdue.

In addition to late payment fees, you can also charge interest on overdue accounts.

This can help to offset some of the costs that are associated with late payments, and it can also incentivize customers to pay their invoices on time.

You can charge interest at a fixed rate, or you could tie it to the prime rate or another benchmark interest rate.

Either way, it's important to be clear about your late payment fees and interest rates in your terms and conditions, so that there are no surprises for customers.

How much to charge in late payment fees

How much you can charge in late payment fees will depend on the country in which your business operates. You can use this late payment 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 amount 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.

There are a number of late payment fee examples that businesses can use as a guide when setting their own late payment fees.

One option is to charge a percentage of the invoice total, such as 0.25%, 0.50%, or even up to one per cent. Another option is to charge a fixed amount, such as $25 or $50 per 30-days that the invoice goes unpaid.

For example, an invoice is for $500. The late payment 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.

In Australia, the late payment 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 payment 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.

In Canada, late payment fees are 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.

How to implement late payment fees in your receivables process

When it comes to implementing late payment fees, the first step is to write them into your credit control policy and payment terms. This will ensure that late payment fees are applied consistently to all overdue invoices.

Because there is no statutory minimum in the U.S, as there is in Europe and the UK, companies based there are allowed to set their own late payment penalties but are obliged to inform the customer of them.

Notifying your clients in advance is a must, as is being clear about the late payment 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.

Ideally, you'll want each of your clients to agree in writing, as this will lessen the chances of late payment 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 payment 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 payment 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 payment fees, let's talk about if you should be applying them in the first place.

The simple answer is yes, you should always charge late payment fees on overdue invoices to cover your costs and time incurred from chasing payments.

But there are a few things you need to take into account before implementing late payment fees.

The pros and cons

While late payment 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 payment fees act as a deterrent to late payers, encouraging them to pay their invoices on time
• Late payment fees can help offset the costs you incur from chasing payments, such as administrative and legal costs

Cons

• Adding in a new late payment fee structure 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 enforce your late payment process

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, or payment installment plans have been unsuccessful, late payment fees may be the only way to offset costs and encourage better behavior.

Categorizing your customers

One of the ways of getting around some of the cons associated with late payment fees is to not apply them with a wide brush. If you categorise your customers by their payment behaviour, you can tailor the late payment fee to reflect that.

Customers who are always late on payments may incur a higher late payment fee than those who usually pay on time.

Customers with long-standing relationships may be exempt from late payment fees altogether.

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 payment fees can be a helpful way of easing the burden of late payments.

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 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 14 days.