Nothing is more uncomfortable or frustrating than a client who is either late or ignoring your request for payment. You’ve delivered your service and the product was top-notch, but your payment is nowhere in sight. No amount of free handyman invoice templates can make your client pay you faster, so what can you do?
If you want to avoid this scenario, charging late fees or interest on overdue invoices is the most sensible and effective way to get clients to pay up and avoid this from happening again in the future. Think of these fees as compensation for cash flow gaps and the inconvenience of chasing them about the payments.
However, these charges can only be legally applied if there was a contract or agreement in place ahead of time that includes an explanation of how and when charges and interest will be applied. Adding this fee after the fact can damage the relationship between your business and the client.
The world of invoices can be confusing. From learning what an itemized invoice is to finding the right auto parts invoice template, you might feel like there’s no end to what you can learn. Overdue charges are just another element to include on your invoice, and we will break down what that looks like and alternatives if you did not have a contract in place that covered an overdue payment protocol.
Interest Fees Versus Late Fees
Interest Fees
When you charge interest, a client pays an additional amount above what is owed which is typically a percentage of the unpaid balance. This total amount due increases with each passing month the bill goes unpaid because the interest fees are added to this number and the next month of interest is added on as well.
For example, if you charge 0.83% on a bill of $100, the new amount after the first month’s late interest would be $100.83. If another month passes and the client still has not paid, the interest is again calculated on the bill from the first month, and the new bill would be $101.66
This encourages clients to pay on time, as their invoice amount will continue to increase as time passes.
Late Fees
Late fees are similar to interest rates in that they are both penalty charges for late payment. The difference is if you charge a flat fee rather than multiply the balance by an interest rate. Across industries, businesses typically charge between $25 and $50 as a one-time late fee.
If your client is still unresponsive and not paying, you can charge additional late fees as detailed in the terms of your agreement. Check that your terms are aligned with your state’s laws on late fee limitations.
How to Charge Interest and Late Fees on Overdue Invoices
Late fees and interest fees are standard practices in all industries, but you should always be transparent about your policies regarding late payments upfront. Clients should be fully aware of all late payment policies and penalty charges before services are rendered. This covers you legally and can support a positive, ongoing relationship with your clients.
Include your policies on the original contract that the client signs. Other information, such as the interest rate, flat fees, and any grace period for late payments should be clearly defined as well.
An example of the terminology you can use is: “Accounts not paid within the terms of the agreement are subject to an x% monthly service charge.” This should be posed as a fee to make up for additional costs resulting from the client’s late payment.
Alternatives to Charging Interest and Late Fees
If there is no agreement in place that covers what will happen when they are late in paying, you have a few options:
- Collect the payment upfront before starting a project: Your client needs to trust that you will deliver on the job and not disappear with the money, but this arrangement does assure that you will get paid for your work.
- See where you can be flexible: It might be possible to work out a payment plan with your client. We’ve all found ourselves in a pinch and using a customer-service approach may win you some recommendations and a customer for life.
- Reach out and ask questions: Perhaps the payment is late because there was a typo in the billing account numbers, or the client never received the invoice. Checking in may clear things up quickly.
- Win more flies with honey than vinegar: Go the opposite route of charging more, and offer a discount for future services if they make a full payment within a certain amount of time.
Save the Trouble and Time
Charging late fees and interest fees can become a tangled legal web. If you aren’t sure of the jargon to include or need more resources for tracking your billing, Invoice Ninja has what you need. Invoice Ninja is an all-encompassing invoicing software platform that can boost your business to the next level!
