Should you charge a late payment fee? How to get paid faster

If you offer customer financing, you’ve likely found yourself in a situation that no business owner wants to deal with—a past-due invoice. One way to avoid such issues is by charging a late payment fee. However, it’s not as easy as simply adding to a past-due invoice. 

Figuring out how to approach past-due invoices is yet another challenge that business owners need to deal with. And, while there isn’t a default solution that applies to everyone, late payment fees are worth considering to instill a greater sense of urgency in your customers. Let’s look at what reasonable late fees you can charge and how to deal with late payments and unpaid invoices:

• What is a reasonable late fee percentage?
• How do you charge late payment fees?
• Dealing with late payments
• How to avoid unpaid invoices
• Choose the best payment setup for your business
• Late payment fee FAQ

What is a reasonable late fee percentage? 

You can charge a flat rate or a monthly finance charge, usually a percentage of the overdue amount. For example, companies typically charge a 1% to 2% late fee.

To charge a late fee, you’ll need to ensure that your fees comply with state laws and have an agreement outlining your late fee policy. Once you have a fee, you will need to calculate it and add it to past-due invoices. 

For example, say your late payment fee policy is 1% monthly. You have a $12,000 invoice for a project that is now a month overdue. You calculate and add the late payment fee to the invoice, which is $120 ( $12,000 x 1%). The new invoice total after adding the monthly finance charge is $12,120 ($12,000 + $120). 

Note that most states do not have a maximum late fee and do not require you to offer a grace period. However, some states may have one or the other, or both. For example, certain states impose a 5% per month limit and require you to offer a five-day grace period.

How do you charge late payment fees?

Charging late payment fees is completely legal. However, you can only do this if your original contract allows for it. To charge a late payment fee, you need to include those payment expectations within your original sales agreement—it’s not something you can add at the last minute. 

Additionally, when charging a late fee penalty, the original invoice should list both the payment due date and the late payment fee.

A late payment policy will help protect your business from delinquent accounts. Here’s how to approach your own.

Here’s how to start charging late payment fees: 

1. Be clear about payment terms: When deciding your late payment policy, you’ll need to determine the payment terms, such as when invoices are due. As well, figure out the late fees you’ll charge, which are generally a percentage of the past-due amount. 
2. Cover your policy with your clients upfront: Document your late payment policy and send it to your customers. Include it in your customer financing agreements or contracts. 
3. Include your policy on your invoice: Your invoice should always include your payment terms (for example, due within 30) or payment due date.

A late fee policy on your invoice can even be a short line at the bottom of your invoice like: 

Overdue invoices will be assessed a late fee of 1% for every month that the payment is overdue. 

The more obvious your payment terms and policy are, the better.

Dealing with late payments

Late payments are frustrating enough on their own. Even worse is when they have a ripple effect within your business. For example, not having customer payments you were counting on means you have to delay paying suppliers. 

Adding a late fee during invoicing for past-due payments can prompt your clients to get moving on issuing payments. But you also have a few different options to encourage your clients to pay promptly:

• Use a payment plan: You may consider offering customers a payment plan for customers who hit financial rough patches.
• Send payment reminders: Reminder emails with the invoice, amount due, payment date, and explanation of potential late fees are an easy way to nudge busy clients. 
• Offer an extension: If you have a customer who regularly pays on time but suddenly finds themselves in a tight spot, you can consider offering a one-time extension.

How to avoid unpaid invoices

While late fees can help you get the money due to you, avoiding having to assess a late fee at all is better. You can help avoid unpaid invoices and having to charge a late payment fee with these invoice management tips: 

• Keep track of unpaid invoices: You’re going to have a hard time collecting past-due payments if you don’t know that they’re past due in the first place. Use tools like accounts receivable aging reports to keep track of your invoices and follow up on the late ones.
• Expand your payment options: Inflexible payment options could be a reason a customer hasn’t paid your invoice on time. Consider expanding your payment methods to include things like credit cards or digital payments. 
• Use automated invoicing: Automating your invoicing allows you to save time and effort and gets your invoices into your customers’ hands as fast as possible. 

Offer discounts for prompt payment: Consider offering a discount in exchange for quick payment, such as within 10 days of the invoice date.

Managing your invoices can be easier with the help of invoice templates, which allow you to customize your invoice with late payment policies and discount offers.

Choose the best payment setup for your business 

Every business needs to collect payments promptly. Overdue invoices are a problem many business owners need to face head-on. Late payment fees can show your customers that you mean business when it comes to collecting the money you’re owed. Even further, they can instill a sense of urgency and get you paid faster.

Invoicing software like QuickBooks Online allows you to create professional invoices quickly and easily. You can also create custom invoices and track them in real time.