Thinking of Introducing a Late Fee?

It’s almost a guaranteed fact, at some point this will happen to every one of us within our small business careers and first time round will likely result in some stress and the odd sleepless night, I am of course referring to late or non-payment! I’m more than thankful that I rarely encounter a difficult client when it comes to payment; in fact it seems to me that most of my residential clients understand that paying on the day is ideal for all parties. I’ve never needed to ask it just seemed to work out, from day one whether it be cash, cheque or PayPal I always received due payment on the day of any repair or returned computer. But then as the old saying goes “There’s always one!”

A quick jump around the Technibble forums and it won’t be long before you run into topics covering all manner of customer difficulties whether it be late payments, payment refusal or customers delaying payment through excuse of the “dog ate my wallet” variety. These problems of course occur with both residential and business customers alike for various reasons so having some form of deterrent in the form of a Late Fee may be the way to go? Perhaps, but there’s plenty to consider before you start adding charges to your next invoice.

Late Fees

Introducing Late Fees into your business model brings in what I like to call an incentive, “something that incites or tends to incite to action or great effort”, deterrent is another word but it doesn’t sound as nice. Late Fee discussions are often very interesting and I’ve yet to come across any sort of agreed consensus about whether they’re a good idea or whether they play some part in actually losing business. In my experience Late Fees do serve an important purpose in the day to day running of any business especially the service related kind such as computer repair. What will ultimately matter is your approach and implementation of these fees into your working contract or terms and how you apply them to any given situation. Our businesses although similar in regards to our target customer base, have very different business models and have a different approach to such situations. Some of us will hands down refuse the idea whilst others maybe going overkill with the possibility of chasing off repeat business.

So what can lead to late or non payment? This list isn’t complete but gives a general idea of the situation we face and incorporates reasons from both residential and business clients. If you can add to this short list then please use the comments below and I’ll get them added:

• 1. Accidental
  The result of not getting paid upon repair onsite can of course occur by complete accident, it does happen. Customer believed that the money was at hand or the cheque book cannot be located, doesn’t use PayPal etc. This of course isn’t a good reason to get the UNPAID stamp out and most clients will be in such a state of embarrassment that payment will often arrive very quickly. Those few residential clients that do struggle to pay will get 30 days before I start sending out the reminders and even then I go pretty easy to begin with, Derrick makes some good points in his recent invoicing article so do give that a read.
• 2. Bounced Checks!
  The bounced check is an excellent example of how late payment can occur and whilst recieving a check on the day is often a happily accepted form of “on time” payment some (from time to time) are bounded in rubber. Banks being banks won’t ring you the moment a problem arises, they’ll just send you the check back and several working days later, you’ll need to advise your client and make decisions on whether it justifies a late fee. This is perhaps one of the most common issues that occur and more so with regards to residential clients.
• 3. Business Payment Runs
  Some of us have a lot of experience with the payment schedules of businesses, all of which appear to have their own way of doing things. More than once I’ve arranged to pick up a check on the day to find that I’ve been added to the company payment run which occurs every week, two weeks or every month depending on where you go so that’s certainly something to keep in mind and is just one of those things you need to factor in. It’s also worth noting that written checks can fall into this type of scheduling but if you need clarification then I’m sure your client will oblige you with the details.
• 4. Repeat Clients
  Repeat business is often the bread and butter of the average tech repair business and more often than not your clients will know that. Some harbouring that little gold nugget of information will sometimes take small liberties in asking to pay you in a couple of weeks or if they can add it to the next bill. Some will ask when they call and others will pretty much tell you after you’ve completed the work, the latter thankfully being a rare occurrence. These are clients I’ve had for years and on these rare occasions I won’t argue it, especially given the countless hours of work I receive. Of course there are limitations to that kind of gratitude we are businesses after all and will ultimately depend on the value of the work taken place. All being said … no late fees from me unless they turn into a repeat offender.

Are late fees lawful?

To put it simply, yes they are. As business owners we do need some form of protection against unexpected late payments that result in additional costs and there are laws in place in many regions which help govern late fees. In the European Union the following directive (2000/35/EC) is responsible for this and there is a short guide for our EU readers here, other regions should check for similar laws but I suspect they won’t differ greatly. It’s important to note that these laws are in place to protect dealings between businesses and not dealings with private consumers/individuals. That doesn’t mean you can’t charge your residential clients of course, you just need to ensure that late fees are clearly defined within your terms and conditions, that they’re agreed, and that they’re proportionate to the original invoice.

Why use Late Fees?

We’ve already mentioned that Late Fees provide an incentive for our customers to pay on time within any predefined payment rules that you set out in your terms or contract. It’s also very important to remember that Late Fees can also be used to recover any costs that you might incur as result of that late payment. As a basic example, time taken to chase late payment through phone calls, writing letters, putting the check in the bank, car running costs to collect payment etc. is time and money better spent doing other things such as helping another customer or perhaps taking that well-earned break you’ve been promising yourself.

Charging Residential Clients

I’ve seen many small businesses consider the idea of charging residential clients for late payment but often it’s quickly dismissed. For many this is an easy decision and where my business is concerned I will avoid charging any type of Late Fee to my residential clients, I really cannot see the benefit. Doing so has in the past created negative feelings towards me and the business and there is the concern that I might put repeat business at risk. If I’ve incurred a small cost as a result of chasing a payment I’ll happily take it on the chin, it’s usually not excessive. With repeat clients it’s often a simple process in that I know I’ll be back in the near future so I’ll just add it in on to the second bill.

Charging Business Clients

With my business clients I take a slightly different approach in that late fees are implemented within any working contract specifically aimed at medium to large businesses ultimately to act as a deterrent (deterrent sounds better in this context). The contract and terms of payment are always clearly defined before the work starts and I’m quite happy to give a 30 day payment term. When doing business with larger companies it’s often quite easy to be forgotten and typically the payment is a much greater value than what I would normally get from residential work. The sort of money that might have made my business operations struggle in the earlier years had payment not been received on time, hence the need for a deterrent. Add the fact that it’s often hard to chase a business as you battle your way through the reception (automated call lines *shudder*) and finally through several people in the accounts department, implementing a charge may feel more than appropriate in the case of businesses. For the smaller businesses I take the same approach as I do with my residential clients, charging a Late Fee is a sure fire way to not getting invited back and as a small business myself I can understand that a little.

Of course it’s important to keep in mind that every business and every situation is very different and Late Fees will ultimately come down to your discretion in pretty much all cases. My advice would be to ensure that it’s well written into your contract and call on it should you need to recover costs incurred as a result of payment delays and chasing. One particular case that saw me ringing up a business every few days to chase a 6 month old payment resulted in call charges of £30 after being sat on hold constantly, the joke being that after I invoiced them I received a check in the post for the £30 two days later!

Changing Your Terms & Conditions

For existing repeat clients whether they’re residential or business you’ll need to notify them if you change your terms or contract to include Late Fees, randomly surprising your client with a late fee on your next visit will make you appear unprofessional and potentially untrustworthy which is obviously bad for business. Being honest and clear about your changes upfront may generate plenty of questions and perhaps the odd criticism but it’s worth doing it now rather than later when asking for the money.

So How Much Should I Charge?

Provided that the fee is proportionate to the invoice charge there should be no problems, what I mean is that provided you don’t do $60 worth of work and then slap on another $150 you’ll be fine, doing so will quickly result in you being shown the door. Proportionate may mean $5 to some and $10 for others but I recommend that you check your local region laws as they may guide you better when you’re researching yourself, ultimately it’s the common sense approach.

Getting late or non-payment on those rare occasions will more than likely be a small hiccup and won’t require calling out the bailiffs, keep these things in mind as well as the other legitimate reasons that are out there because there are plenty. Aggressive chasing and excessive fees if not handled with care can horribly backfire and can create an evil empire reputation whilst on the other hand having it written and squared away tightly within your terms or contract will protect you should you incur expenses as result. If there’s a need to take it further then your legal advisor will be much happier seeing that your three months late non-paying client has already agreed to pay the late fees.

I hope that this late fee introduction has proved helpful, gives you an idea of what you might expect from using them and whether they fit with you and your business. Perhaps you already implement a Late Fee policy? Does it work well for you or cause you more problems? More interestingly have you used it and how much did you charge?!