How to Charge Late Fees on an Invoice and Get Paid Faster
Late payment is a big problem for small businesses and freelancers who rely on prompt payment to maintain a steady cash flow and pay the bills. One of the most effective ways your company can encourage clients to pay on time is to begin charging late fees on invoices. To charge late fees, you should first research how much interest you can charge in your state. Then, have a discussion with each of your clients and notify them of your new late payment policy. Once you’ve let all your clients know that you’ll be charging for late payment, you can add the specifics of your late fee policy to the payment terms section of your invoice.
Explore these topics to learn how to charge late fees on an invoice and get paid faster for your services:
How to Charge Late Fees on an Invoice
Charging late fees can encourage clients to get in the habit of paying their invoices on time. Here’s a step-by-step guide to charging late fees for your small business:
Do Your Research
Before you dive in and start charging clients late fees on their invoices, it’s crucial that you do your research. Find out how much you are legally allowed to charge in interest fees to avoid legal issues. Maximum interest rates vary from state to state, but this helpful guide to usury laws can help you determine how much you are able to charge by law.
If you have a local network of contacts who run businesses that are similar to yours, you can ask around to see what others charge for late fees to determine what the going rate is in your area.
Notify Clients Ahead of Time
Once you’ve determined how much you’ll charge in late fees, give your clients a heads up about the upcoming changes to your billing policy. You can do this by email, phone or in person, but it’s important that you have a discussion with each client and give them the opportunity to ask questions, so they aren’t caught off guard the next time they receive an invoice. Moving forward, always discuss your late fee policy with new clients before signing a contract.
Add Your Late Policy to Your Invoice Payment Terms
Add the details of your late fee policy to your invoices, in the payment terms section of the document. Make sure the section is easy to read and clearly written. Keep your terms simple and brief. For example, your payment terms could read:
“Thank you for your business. Payment is due within 30 days. Please be aware that we will charge 1.5% interest per month on late invoices.”
Include Your Late Fee Policy on New Contracts
It’s a good idea to write your late fee policy into all new contracts you sign with clients. Because a contract is a legally binding document, it’s important to clearly state your late fee terms within the contract. Including your late fee terms in your contracts also ensures clients are aware of the policy before any work begins on a new project.
Ensure Due Dates Are Visible
Set yourself up for timely payments by making sure your invoices clearly convey all the information clients need to pay you on time. Your payment deadlines should be easy to see at a glance on your invoices. You can make them stand out by using a larger, bolder font or choosing a different font color.
Send Invoices Promptly
As soon as you complete a project, create an invoice and send it to the client along with the final work. Sending the invoice when the job is still top of mind will increase the likelihood that your client will process the payment right away, so you’ll get paid faster. After you’ve sent the invoice, set a reminder for the invoice due date, so you can follow up right away if the invoice isn’t paid. If you use a cloud-based accounting solution, it can automatically notify you when invoices are past due.
Follow Up Immediately on Late Payments
If you haven’t been paid, follow up with the client on the payment due date. Write a brief, polite email that does the following:
- Reminds the client that payment is now due
- References the invoice number
- Outlines the amount owing
- Reminds the client of your late fee terms
- Has the original invoice attached, for reference
Send a Revised Invoice
If your client still fails to pay, you can begin charging late fees. After 30 days, send a revised invoice that includes your late fees for the month. Include a note in your accompanying email that acknowledges this is a second notice and the payment is now 30 days overdue. Continue to follow up with the client by phone and email until you’ve received payment or confirmed a payment plan.
If Necessary, Escalate the Issue
If you’ve followed up diligently with the client and still haven’t secured payment for your services, you may decide to escalate the issue and explore other options. You can hire a lawyer to get legal advice and send formal letters requesting payment. You can look into collection agencies or take the client to small claims court. This article gives tips on dealing with a client who won’t pay their bill.
How Much Can I Charge for Late Fees?
The amount that you’re able to charge for late fees depends on the state you live in, because maximum interest rates are governed at the state level. You can check the usury laws in all states to confirm what percentage you can charge for late fees.
Generally though, if you charge less than 10% interest per year, you won’t run into any legal issues with your late fee policies. A common approach to late fees among freelancers and small, service-based businesses is to charge 1.5% interest per month on unpaid invoices.
How To Calculate Late Fees on an Invoice
To calculate late fees on an invoice that is 30 days overdue, take your monthly late fee rate, and multiply it by the total amount owing on the invoice. For example, if your late fee rate is 1.5% per month and your client’s invoice is for $3,000, you would calculate the late fees this way:
3,000 x 0.015 = 45
So, in this example, you would add $45 in late fees to the invoice total.