As we have said in the past, credit terms are never a one size fits all concept. Though the industry standard tends to be Net-30, there are many reasons why it might make sense for you to shorten or lengthen this time period. Regardless of what terms you use, the question becomes how do you make sure your customers are paying on time. Sure, you could just stop selling to those who pay late, but this will lead to you losing many customers unnecessarily and is not a good reputation to have when trying to acquire new ones. One method that many companies use to incentivize on-time payment is late fees. While we do think this can be a good idea, here are some things to consider about a late fee policy.
A Bargaining Chip
While in an ideal world all late accounts would agree to pay you all of the money owed plus any late fees, this is often never the case. If someone could not afford the payment, they most likely can’t afford late fees. This is especially true if the late fees represent any sort of meaningful revenue source. This then begs the question, why even have the fees in the first place? While you may not get paid the late fees, they serve as an added bargaining chip to use in negotiations. Say your customer owes you $1,000 plus an extra $75 in late fees. By offering to wave the late fees, you are essentially giving your customer a 7.5% discount while not really losing anything. You then get what you want and your customer feels like they got a deal.
When to Start Charging a Fee
This is largely dependent on the type of credit terms you are already operating on with this customer. If a customer is paying on Net-30 terms, we recommend giving them an extra 30 days post due before you start applying a late fee. This is a good standard to go by, but it can be lengthed for longer credit terms and shortened for shorter ones.
How Much to Charge
This will vary by industry and the size of the accounts your company handles. The industry standard tends to hover between 1% to 2% a month but can be higher in some cases. We recommend you try to stay close to this range as you want to be reasonable and competitive with others in your industry.
Late fees can be an important part of any credit policy, but there a few things to remember before you add anything to your contracts. For starters, you need to make sure that any sort of fee complies with the laws in your state. While late fees themselves are legal, there are certain laws governing how much you can charge and other specificities. If you are considering adding one to your credit agreements, we recommend talking to a lawyer first. Secondly, you need to make sure your customers are aware of the fee and that it is explicitly stated in their signed agreement. This is not only for legal reasons, but it is also important your customer understands and knows about any fees they may have to pay.