Whether you’re a CFO, a trained credit collections professional, or an office manager tasked with collecting invoices on credit sales, you know how bad it can be when customers pay late. Not only does late payment impact your performance metrics, cost you money, and cash flow: it’s just frustrating. You held up your side of the deal by providing them with a product or service, so why can’t they keep theirs and pay you on time? One way to cut down on late payments is to charge late fees, but is that considered an accounts receivable management best practice?Charging late fees is not the best thing to do for every company or for every customer. While you may cut down on the number of late payments, you could potentially scare customers off, especially if charging late fees is not standard practice in your industry. With that being said, some businesses find that charging late fees can be pretty beneficial.

Before you make up your mind, consider the following points:

  • Think about how much your late fees will be. What is the norm in your industry? In most cases it will be a flat fee or a percentage of the invoice amount.
  • Check with your attorney before setting your late fees, rules and regulations around these things change from state-to-state.
  • Always make sure your customers are aware of the late fees and include them in the contract- front and center. You will also want to make sure to explain to the customer, and in the contract, what will happen if payment is not received. Examples of this might be an elimination of future credit or a cancellation of services.
  • It will also be important to ensure your employees are aware of these penalties so they can communicate them to customers and answer any questions regarding them. Make sure they know the process around charging late fees as well.
  • Don’t rely on the contract to get the point across. Contracts are usually very long, boring and confusing, so anything you say about late payment penalties could get muddled in the customer’s mind. Be sure to also put the consequences of late payment and associated fees on the bottom of every invoice and reminder. Not only will this remind customers that paying you on time is important, it will also cut down on the number of customers who try the “you never told me there was a late fee” excuse.
  • If you tell customers they’ll be charged a late fee, are you prepared to follow through? Some companies find that collecting late fees and putting up with unhappy customers being charged with late fees is more of a hassle than a benefit that is something you will need to decide for yourself.

If after reading the above points and you feel uneasy to start charging a late fee, then maybe it isn’t right for your business. However, many companies have found success in charging a late fee as customers would much rather pay on time than pay more money.