Collecting Payment: Should You Charge Late Fees?

Should You Charge Late Fees?

If you do the work, you deserve to be paid. That’s only fair, whether you’re an employee or you work for yourself. But as a contractor, we’re sure you’ve encountered at least one slow-pay customer (and if it’s only one, you are one lucky egg!). But even just one customer who can’t pay on time can gum up the works for your business. So, what can you do to get the customer to pay up?

Well, one option is to add a late fee to their balance. In most cases a 10 percent fee is legal, or you can add a flat rate if you prefer to go that route. But there are some things to consider before you throw on extra money and send that new invoice.

1. Do you have a contract?

Okay, so this might cause you to roll your eyes and think, “Duh!”, but there are still business owners who skip this step before starting a new gig. If you have one, good on ya for making and adopting smart and sound business practices.

2. Is the payment arrangement spelled out in the contract?

If you do have a contract, do you spell out payment terms? For example, do you require half down, with the balance due at the end of the project? When is payment actually due? If this is all in the contract, then you have grounds to add a late fee after the fact. But if payment isn’t explained in detail in the contract, then it’s your word against theirs as far as when payment is due. That could make tacking on a late fee problematic.

3. Will adding a late fee actually make them pay?

If you completed the job and they still haven’t paid you, is it realistic to think that the threat of paying more would be enough to make them cough up the funds? Think of it like this: If someone owes you $500, are they going to suddenly pay you if you raise the cost to $550? If you think the threat of owing more would work, then work up a new invoice with the late fee. If not, you might just want to keep demanding the actual cost.

4. Firing a warning shot first.

Before you tack on the late fee (and especially if there’s no mention of penalties for late payments in your contract), warn them that if they don’t pay within a certain period of time, you’re going to tack on a late fee. This way, they cannot say they weren’t given an opportunity to pay up before you added any late fees.

5. Just how late are they?

Depending on the job and other factors, what do you consider late payment? If it was a simple job with a relatively small price tag, a week or two isn’t really that bad. If it was a larger project with a heftier price tag, a month or so may not be an unreasonable time to wait for payment. Anything more than two months overdue however Is worthy of at least a warning, if not a late fee. But again, if you’re doing huge projects and you aren’t outlining payment arrangements –and this includes late fees—in the contract, you really need to rethink your business practices.

Ultimately, the decision to assess a late fee is yours, but you might want to really think about the issues mentioned above before you decide which approach to take. Not assessing a late fee could make you a target for additional late payments in the future but jumping the gun and tacking on extra could also cost you business.

Have you ever been late paying someone you owed money to? If so, how did they handle it and how did that make you feel toward them?