You’ve delivered as promised to one of your clients. You’ve invoiced for services rendered. And you’ve waited… and waited… and still you haven’t been paid. Should you charge a late fee?
If you do, will it harm your relationship with the client irrevocably, and should you care if it does? Charging late fees may seem like a small decision, but it’s one that can be agonizing. Understanding what’s behind the late payment can help you determine whether to ding the customer for it, and establishing new strategies for invoicing can help you avoid the nasty situation in the first place.
Why Customers Pay Late
You can’t really predict whether late fees will force a customer to cough up the money they owe you if you don’t know why the customer is paying late. If your customer contracted for services but isn’t able to pay, the circumstances may govern your response. Perhaps the customer has hit a temporary tough patch, and all that’s needed is a reasonable payment plan. If that same customer continues to pay late, though, you may want to explain politely that you don’t work for free and move on.
Other customers pay late because they can. If you’re a small business, large customers may realize they hold all the cards and withhold pay just for the heck of it. Others may simply consider your invoice a low priority. In both cases, you may need to remind your customers that you’re not in the business of extending credit. Be prepared to let these customers go as well. Finally, some customers refuse to pay because they’re angry. In this case, the temptation may be to escalate the conflict, but in fact, you should do the opposite.
Find out why the customer is angry, and go out of your way to fix the problem. You may even choose to give the customer a cash discount — which could be well worth it if you retain the customer’s business and good will.
When Can You Charge Interest Fees?
While it’s tempting to slap late fees on an invoice that’s been sitting unpaid, be careful. You can only charge late fees or interest if the original contract for products and services allows it. Make sure when you draw up your contract that you specify the amount of late fees that can be charged (usually a percentage of the outstanding balance accruing monthly), and mention the time frame governing late fees as well.
Even if you’re legally allowed to charge the late fees, you may find you actually get paid more quickly if you offer the customer incentives for paying (such as a discount if payment is received within a short time frame), rather than threatening the penalty of late fees.
Alternatives to Charging Late Fees
Charging late fees isn’t the only way to deal with delinquent accounts. By organizing your collection process and assigning an employee as a point person to reach out to late customers, you may be able to make payment arrangements. Create a script to help your collection representatives be consistent, and make sure they document every contact with the customer fully. Tech such as the Late Fee Manager app can also help you by sending reminders automatically.
Another positive step to avoid late fees is to establish invoicing procedures ahead of time that take into consideration the possibility of late pay. Consider offering incentives for early pay, and offer payment plans upfront. You might demand 50% of your fee before you start on a new project, invoicing for the remainder when you deliver. Be clear from the beginning about your invoicing procedures so your customer knows exactly what’s expected.
Assessing late fees isn’t always the best possible choice when you’re trying to get paid on a delinquent invoice. Establish payment protocols and procedures ahead of time, and try other routes to get paid.
How to Ensure Clients Pay on Time
How do you handle those slow-paying customers, delinquent accounts and bounced cheques? Setting up standard policies and procedures can help encourage customers to pay faster to keep your business cash flow moving. It comes down to staying on top of your invoices, following up with customers and having customer-friendly policies in place to make sure you get your money without alienating your customers.
Automate Your Invoicing
Automating your invoices and sending online invoices can help cut down on the chances of late payments. You’re able to send out invoices quickly to encourage customers to pay right away. When you invoice a customer right after the product or service gets delivered, it’s fresh on your customer’s mind, and that can speed up payment.
QuickBooks Online lets you issue invoices on the go and set up automated email alerts to remind clients when their account is overdue. The system also stores your invoices in one place, so you can have a clear picture of those that have not been paid. The software integrates with your bank account, and being cloud-based makes the data accessible from any device anywhere.
Streamline Payment Options
Some clients let payments go beyond the due date because the payment options aren’t convenient. Expanding on the payment methods you accept can help remedy some of the delinquent accounts for your business. Look at the payment options you give your clients now. Do you offer several different options or only one? Consider opening it up to other payment methods if the options are limited. This includes cash, cheques, credit cards, electronic funds transfers, wire transfers or payment remittance through third-party systems.
Flexibility in how you receive your clients’ payment information can also help. Some customers find it easier to provide credit card information over the phone or physically deliver a cheque to a location other than your main storefront, for example. When you send invoices electronically through QuickBooks, you can offer online payment options that add convenience for some customers.
Tracking Unpaid Invoices
Once you have the foundations of your accounts receivable in place, it’s time to monitor the situation. If you have lots of customers, you run the risk of eventually facing late payments and uncollected accounts. Some businesses ignore these delinquencies or don’t prioritize them, and others focus on them on a regular basis. You can’t collect on unpaid invoices if you don’t know you have them. That’s where tracking comes into play. Getting into the habit of tracking invoices and following up on late ones keeps the cash flowing into your business account and ultimately increases your net profits. Even if you can’t collect 100% of your overdue accounts, doing something is better than doing nothing.
Tracking unpaid invoices become less time-consuming when you use accounting software such as QuickBooks. You can generate reports and set up notifications in the system to let you know when invoices are overdue or when they are paid. Choosing a set interval, such as weekly, monthly or quarterly, for checking up on delinquent accounts helps you stay on top of the situation. Then, you can decide how to contact customers with past-due accounts to remind them gently that their payments are due.
Send Email Reminders
Prompt payment from your clients safeguards your business’s cash flow, but if your clients lose their invoices or get distracted by other matters, they may forget to pay. To reduce late payments and tighten the payment term, send out email reminders, which offer a softer, less-direct approach to collections.
These reminders go out instantly, unlike mailed reminders which add postage costs and take time for delivery. Plus, it’s a non-invasive way to get your customer’s attention without making an uncomfortable phone call. You can send polite reminders to clients in case they simply forgot to pay.
Sometimes all a client needs is that gentle nudge to make the payment. Consider including a copy of the overdue invoice with the email to help remind the customer of the bill and give them the information they need to pay it.
Online invoicing services often let you set up automatic email reminders if the invoice isn’t paid in a certain amount of time. This option means you don’t have to spend a lot of time tracking down late payments and sending the email reminders manually. Your software handles the work for you, giving customers the reminders they need to get moving on their payments.
Careful wording in your email reminders can make them more effective. For example, you may want the first message to serve as a gentle reminder to pay the invoice, so your language should be friendly and casual. You might say, “Hello! We just wanted to reach out to let you know your outstanding balance is a little late. We understand that life gets busy and you probably just forgot about the bill. Thanks for making your payment as soon as possible!”
If the customer ignores your initial email reminder, it may be time to step it up and use stronger yet still polite and professional language. You should still keep the correspondence professional because it reflects on your business. But it may be time to let the client know you’re expecting your payment immediately and you plan to take action if the account doesn’t get settled.
Let the customer know what you plan to do next. For example, you might say, “If we do not receive payment by October 15, we will send your past-due account to collections.” That can be enough to encourage the customer to pay up so they don’t face any additional collections activity.
Knowing how to plan for and handle late payments helps you keep your business finances on track. QuickBooks Online helps you create and send invoices online that help you get paid 2x faster. Try it free today.