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

Adding a late fee during invoicing for past-due payments can prompt your clients to proceed with 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, 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 why 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 saves 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. 
• Leverage artificial intelligence (AI): AI-powered accounting software like QuickBooks Online employs AI agents that cut average collection cycles by five days using behavior-triggered reminders. 

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.

Legal and ethical considerations for charging late fees

Charging late payment fees is legal in most states, but only if you follow the rules. You’ll need to be upfront about your policies, comply with any state-specific limits, and stay fair in your enforcement. Here’s what to keep in mind.

1. Disclose everything in advance 

You must include your late fee policy in your original agreement or contract. If you try to charge a fee without prior notice, your customer may have legal grounds to dispute it.

2. Know your state’s limits

Some states cap the amount you can charge or require grace periods before a late fee kicks in. Always double-check local laws or speak with a legal advisor to stay compliant.

3. Avoid excessive fees

Even in states without specific limits, courts may still rule against unreasonable fees. Stick to common standards like 1% to 2% per month to avoid claims of predatory practices.

4. Be consistent, but flexible

Apply your policy consistently to avoid favoritism or legal risk, but consider offering one-time exceptions to loyal customers who usually pay on time. This helps maintain goodwill without undermining your policy.

5. Put it in writing

Any time you update your late fee terms, resend the agreement or invoice with clear documentation. Transparency helps prevent disputes and sets the tone for professional client relationships.

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 collecting the money you’re owed. They can also 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. 

Disclaimers: Based on U.S. Intuit Assist Beta customers using outstanding invoice notifications and AI-drafted invoice reminder features, compared to customers sending standard invoice reminders to the same customers, from January 2024 to August 2024. Not available in QuickBooks Online Advanced.