“Our bookkeeper is on vacation!”
“It must have gotten lost in the mail!”
“I never saw that invoice…”
Here they come. The never-ending stream of excuses for late checks. Getting your clients to pay you on time is one of the most frustrating and most common issues you will face as an agency owner. But, however annoying it can be to constantly nag clients, managing late invoices comes with the job.
If you regularly have to deal with the same group of late-paying clients, it may be time to consider imposing a late fee as part of your pricing model. Chasing checks every month costs you time, which will cost you money in the long run, so it makes sense that you should make up for that lost money.
3 Things To Consider Before Introducing a Late Fee
It’s totally normal to get angry when a check is late by a couple weeks or even a month. But, make sure you don’t act impulsively and charge a late fee out of the blue. Here are some things to consider before you introduce a penalty for late invoices:
1. Ask why it’s late
First, you need to understand why your client is always late when paying you. Are they having cash-flow problems or are they just forgetful and flakey? Identify the root of the cause so you’re better able to resolve the issue. And, remember: if your client blows up at you and ends the relationship during this conversation, it’s for the best. It was probably going to happen eventually, and this issue gave them the excuse they needed.
2. Offer a discount for prompt payment
Instead of charging a fee for late checks, consider doing the opposite and offering a discount for prompt payments. You could take 2% or 5% off of checks that are received within a week of invoicing. This avoids a potentially uncomfortable situation and focuses on the positives versus the negatives.
3. Re-evaluate your contract
Make sure your contract is amended to include any new late fees and that both parties sign the new version. Add a section that says something like, “payments made after X days after the agreed upon due date will be increased to include a x% charge.”
How Much Should You Charge?
For some agencies, it makes sense to charge a 1% or 2% late fee. But, for smaller agencies that are dealing with lower numbers, 2% may not provide enough incentive for your clients to start paying on time. Look at your pricing model and how much you are charging your clients to come up with the right late fee. Here are some options:
- The first time the check is late (after the new contract is signed with the late fee terms), charge a 5% late fee. The second time, charge 10%. The third time, 15%, and so on.
- Impose a 1-2% late fee per month.
- Charge a flat 10% – 20% flat late fee once the check is X days late.
- Add 15% for every month the check is late.
- Charge a rate of 20%, compounding daily.
Note: You may want to check your state’s usury laws before introducing late fees. Texas, for example, consider late fees as a form of interest and is regulated by the state.
Although imposing late fees can make the wait more worthwhile, some clients are just more hassle than they’re worth. When you’re thinking about penalties for late invoices, don’t forget that ending the relationship with the client is also an option. It’s certainly a more dramatic approach, but if ending the relationship could save you time, it could be the most beneficial.
What do you think? Do you have clients who are chronically late? How to you handle late fees?