Small business invoices may not always look alike, but the information on all of them is generally the same. After filling out your personal information, scope of work, total cost plus any additional tax, you’ll likely see the option to bill for late payment.
Often listed as part of the payment terms and conditions of your contract, charging late payment fees is a practice that many small business owners abide by, especially since it means you’re more likely to be paid sooner by your client.
This article will offer an overview of why charging for late payment fees may be a financially savvy move for your business, and how to go about doing it properly.
Why charging late payment fees can be a good idea
Generally, billed invoices are paid in 30 days. However, if you’re a freelancer, or are outsourcing your services, that client may take even longer to pay you. Not being paid on time is a frustrating problem that unfortunately, is all too common for many small business owners.
If you’re tired of waiting weeks, or even months, to be paid for the services you provided, charging late payment fees could alleviate some of your grievances. Here’s why:
- You’ll get paid sooner—Late payment fees could persuade the client to pay you on time, or risk paying you more in the process.
- They show you mean business—Late payment fees show that you, as a small business owner, won’t tolerate being taken advantage of, especially when you deliver your end of the bargain!
- You might make even more money—After sending your invoice, you’ll be paid, regardless. But if you add those late payment fees and the client doesn’t respect your payment terms, you might even make more money.
Can you charge interest on unpaid invoices?
If you haven’t yet received payment, you might consider billing for interest, in addition to the amount that you already invoiced for. Charging interest on unpaid invoices is perfectly legal, so long as you obey the law.
A good relationship with your customer should always remain your key focus, as you don’t want to jeopardize the business relationship over a few extra dollars. Nonetheless, if you plan on charging interest on unpaid invoices, make sure that the amount to be charged is clearly stated on the original invoice, as well as within the contract, so that all parties understand the conditions of the agreement.
What should you include on an invoice for payment terms?
Your payment terms should be clearly defined. Foremost, they should include the going rate for the completed project (whether that is an hourly rate or a set fee), payment terms (such as Net 30 or invoice due date), and how the customer can make a payment.
For example, if you would prefer a cheque mailed to your place of residence, or business address, include the appropriate information, including the postal code. If you prefer a direct deposit into a bank account, you’ll need to include your banking details, including the branch number, the institution number, the transit number, and finally, the account number.
It’s important to remember that payment terms and late payment fees are two entirely separate things. Payment terms refer to when and how you’d like to be paid, whereas late payment fees are a friendly—yet assertive—reminder to your client that there are financial penalties, should they not pay in time.
How long should you give someone to pay an invoice?
Opinions vary on how long you should give someone to pay a due invoice, but they can vary from “net 10” to “net 90” or “net 120.” “Net 30” is the most common payment term. This means that payment is due 30 days from the time you file the invoice. Some invoices also enforce a clause with a “payment on due date.”
For small business owners who work with the same clients on a rotating basis, you may be able to offer a degree of flexibility in your payment terms. If you have the cash flow to do this, it can ultimately only help strengthen your existing business relationship. For example, if a client you have worked for before asks for a grace period of 10 days on your Net 30 invoice stamp, you might consider it, knowing you’ll likely work together on additional projects. Giving customers a month to pay you is a standard practice and a good starting point. Using a range that is too long could be challenging, especially if cash flow is tight and you need income as soon as possible.
Establishing payment terms ensures the client is aware of a deadline for payment, and if that deadline is not met, late payment fees may ensue.
How much can you charge for late payment of invoices?
There’s no golden rule on how much you should charge for late payment of an invoice, but there is a maximum amount that you are legally allowed to. A lawyer can help you decide on what a fair percentage is, and they can include it in your payment terms on the contract you send to your clients. One thing to always keep in mind is that charging these late payment fees should never be looked at as a means to earn more money from your client. But it should be a motivator for clients to pay you in a timely fashion.
What is the standard late fee on an invoice?
Standard late fees and standard maximum legal late fees are two different things. Maximum fees vary by province, but as a starting point, many small businesses charge between 1.0 and 1.5 per cent per month on top of the invoiced rate. It’s important to remember that whichever rate you choose to charge on the invoice for late fees should always match the details of the original contract, to avoid confusion and potential legal troubles.
How do you calculate late fees on an invoice?
Calculating late fees on an invoice is relatively simple. You can choose to calculate these percentages manually or, if math isn’t your strong point, you might want to download accounting software, which will automatically add the percentage to your total. Just remember to keep a record of these charges in a personal spreadsheet, along with your original purchase orders, so that when tax season arrives, you have a record of any changes to your invoices.
3 tips for charging interest and late payment fees
Charging interest and late fees on top of your regular rates could mean the difference between being paid on time or waiting for weeks or months to receive compensation for your services! The following tips will show you how to charge interest and/or late fees without hurting business relationships, or taking up too much of your own time.
1. Hire an accountant or use accounting software
Having a trained accountant or bookkeeper calculate your late fee percentages ensures no mistakes will make it onto your invoice, and all legal terms will be correct. Most accounting software has preloaded invoices, as well as late fee calculators embedded into the programming.
2. Calculate the best interest rate
Don’t just guess, or pick a random number. Arrive at a fair and reasonable price by first deciding on the annual interest rate,
3. Gather any required forms or paperwork
If a client isn’t paying you on time, you can also first try sending what’s known as a demand letter. These documents are essentially letters in which one party demands payment from the other party (the client) before taking legal action, or enforcing the late payment fees.
Charging late payment fees on invoices is not mandatory, but it could help to ensure that you’re paid on time for your services. If you do plan on tacking on the extra charges to your client’s bill, always clearly outline the terms and conditions of the business agreement in a contract.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.