Crafting a Late-Fee Policy for Your Small Business

One of the biggest challenges for small business owners is collecting on past-due invoices. If your clients pay late, it could cause a major disruption to your cash flow and result in you making late payments yourself. One deterrent is to charge a late fee for past due accounts, but how do you decide upon a fair fee?

No matter what you decide about this, it´s important to have a clear and firm late fee policy in place before you do business with a new client. Your late fee policy should be a standard inclusion in the written contract or agreement you have with all clients. Plus, having a well-defined written policy is helpful later on if you need to hire a collection agency or decide to sue for payment.

Here are some tips to consider when developing your late fee policies:

Returned checks: Include a provision for a charge for any returned checks. Since a bounced check will cost you bank fees, you should charge the client at least the amount your bank charges to cover the costs and inconvenience. (You can also try submitting the check or taking the check to the bank it was issued from to see if there are sufficient funds.)

Interest on overdue balances: You need to set a specific percentage of annual interest charge on the late balance. Late fee charges are regulated by your state government, so check with a business attorney in your state to see what the average and maximum percentages allowed are.

Legal fees: Also state in your policy that the client must pay all collection fees and attorney´s fees if you send the account out to a collection agency or sue for back payment.

You may want to charge different fees to different clients depending on their risk to your cash flow. Obviously this can get confusing if you don´t keep track of your accounts carefully. But the most important thing is to set your policy upfront and enforce it consistently. In the beginning of a business relationship, it is common to require COD (Cash on Delivery) until you feel the relationship is solid enough for a payment plan.

What do you do when a payment is actually late? Before you start calling collection agencies, make sure you have done your best to understand the situation that led to the late payment. Give the client a call to see if you can work out a payment plan or another solution so the client won’t have to pay the late fee. If late payments from the client become a regular occurrence, however, you may need to terminate the relationship until the client gets back on their financial feet.