Applying Late Payment Fees on Invoices

Thankfully, the application of late payment fees can effectively solve that problem, ensuring the timely payment of invoices.

Is it even ethical?

Despite being one of the most effective weapons against late payers there are still many businesses who are afraid to use late payment fees, believing that it will scare clients away. However, it does quite the opposite since the application of late payment fees on invoices conveys the message of a professional business owner who is willing to utilize necessary legalities in order to make sure the company runs as it should.

Late payment fees can also work in the same way as discounts, only this time clients are charged with extra fees as opposed to being rewarded if their debts are paid in time. Although rewarding customers does definitely sound better, both approaches work well when it comes to encouraging clients to pay in a timely manner. In other words, whether you want to offer a discount or apply a late payment fee is only a matter of personal preference.

Additionally, there is another area where discounts and late charges are similar, namely the fact that they shouldn’t be applied to everyone. For instance, late fees can be waived for those who always pay in a timely manner or customers who can’t pay due to unforeseen circumstances such as financial difficulties. It doesn’t need to be a strict application to every invoice.

The correct way of applying late payment fees

Setting up late payment fees seems rather simple, but much like discounts they cannot be applied without establishing some rules first.

No hidden fees

Nobody likes hidden fees, so the warning of applying extra charges in case of untimely payments should always be indicated in all contracts alongside the exact amount of the late fee, which shouldn’t exceed one-twelfth of the maximum annual interest rate of the state your business is registered in. In addition to stipulating the terms of late charges, the same warning should also be included in the invoices.

The amount of late fees

In order to reach a correct amount, the first thing to do is to calculate the daily interest rate, which is the original amount due multiplied by the maximum annual rate of the state and then divided by 365. This resulting number is the daily interest rate, which can be used to simply multiply for the amount of days overdue for the late fee that should then be applied to the original bill.

For example, a $200 invoice would increase to $201.48 if it weren’t paid for 15 days considering an annual interest rate of 18%. In this case the equation is:

Daily interest rate: ($200 x 0.18) / 365 = 0.09863
Total due: (0.09863 x 15) + $200 = $201.48

Simplifying the process with online solutions

Although it’s virtually impossible to list all of the benefits of online accounting solutions, there are actually two that could be very helpful when it comes to applying late fees.

One of these is debtor tracking, which is present in all accounting software. This feature always warns you of any unpaid invoices either under a separate tab within the software or via an informative dashboard that displays the current status of your business. In addition to that, there are certain solutions like FreshBooks that – aside from tracking debtors – will automatically apply late fees on unpaid invoices.

It’s worth noting, however, that FreshBooks is a rare example, as most accounting solutions aren’t capable of handling late fees, instead they will send payment reminders and require users to manually apply late charges onto debtors’ invoices. Thankfully, this can be easily evaded by integrating a third-party debt tracking app into the accounting software, such as Debtor Daddy, InvoiceSherpa, ezyCollect, Chaser or the appropriately named Late Fee Manager. All these apps possess features – such as fully automated debt collection – that not even the most advanced accounting programs currently have.

And if that’s not enough, there is the ace in the hole: fast payment. Once this feature is activated, not only can clients pay their invoices through faster means but your chances of being paid in time also increases significantly.