It’s a constant struggle for small businesses to get paid on time.
In fact, 64 percent of small businesses are paid late, according to a recent analysis by San Francisco-based Fundbox.
Charging a late fee could help push late payers, but many small businesses are reluctant to do that for fear of creating ill will.
“The most common reason small businesses don’t charge late fees is they don’t want to upset the customer,” explains Michelle Dunn, a Plymouth, New Hampshire-based collections expert and author of “Effective Collections” (NeverDunn Publishing; $14.95).
But that can be a mistake, especially for chronic late payers, she says.
Businesses “have to realize they want good-paying customers and that they’re in business to make money,” she says.
That doesn’t mean you can’t waive the fee for good paying customers who happen to pay late on a few occasions, Dunn says, but if you ultimately decide to charge a late fee, make sure you have a policy in place to do so.
It’s a good idea to have some form of contract with the client even if it’s a purchase order or invoice, says Don Hochler, a Woodbury-based commercial litigation and collections attorney. This document should include your late-fee policy, he notes.
Bottom line is you can’t just decide to charge a late fee after the fact if it wasn’t in your initial agreement, Hochler says.
“You absolutely should put it on the invoice, and you can always elect not to charge it,” he says.
Even if you don’t charge it, it can work well as an incentive to get people to pay, says Wade Johnson, founder and principal of R. Wade Johnson Design, a St. James-based architecture and interior design firm.
Most of the time when it shows up on the customer’s next bill it prompts him or her to call and settle the bill, he says. His company’s late fee is 1.5 percent after 30 days.
The firm sometimes uses it as a negotiating tool, says Teri Kronman, an interior designer and executive director at the firm.
For example, it may negotiate the late fee down to 1 percent or less when negotiating a new contract, in lieu of waiving other fees that may arise during the project, she says.
Most of the time the firm waives its late fee, because it will ultimately come to an agreement with the client to pay the bill promptly.
“If we had to add up how much we collect a year in late fees, it’s probably under $1,000,” Johnson says.
Deciding whether to invoke a late fee also can be impacted by a client’s size. A small business may be less inclined to impose a late fee on a large customer.
“Small businesses are many times in a ‘deleveraged’ position,” explains Jordan MacAvoy, vice president of marketing at Fundbox, a technology company that provides advances to small business for outstanding invoices.
The recent Fundbox analysis of 20 million invoices in its system found that large corporations take the longest to pay small businesses.
“It’s become standard practice that invoices are paid a little later,” MacAvoy notes.
Small businesses should be clear on their policies up front and implement a communication strategy so they’re in contact with clients promptly if they are late on payment, he says.
When deciding whether to implement a late fee, gauge the client’s response when you do reach out (are they being cooperative?), Hochler says.
And if they’re consistent late payers, it may give you an edge, Dunn says.
“They will pay the people that charge a late fee before the people that don’t, so they don’t incur more charges,” she says.
•48% of Net 30 invoices (those due within 30 days) are paid late
•45% of Net 60 invoices are paid late
•35% of Net 90 invoices are paid late