Charging late fees on overdue invoices might seem like a small decision, but it is one that can be agonizing. Understanding what is behind the late payment can help you know whether to ding the customer for it or establish new strategies for invoicing.

However, when an account is overdue or a payment is late, businesses are allowed in Canada to charge interest compounded monthly at the average bank rate plus 3 percent from the due date to the day before the date that payment is received.

Even though it can be quite tempting to slap late fees on an invoice that is been sitting unpaid, it is very pertinent to be careful. Note that you can only charge late fees or interest if the original contract for products and services allows it. Always ensure when you draw up your contract that you explicitly state the amount of late fees that can be charged (usually a percentage of the outstanding balance accruing monthly), and mention the time frame governing late fees as well.

Even if you are mandated by law to charge the late fees, you may find you actually get paid more quickly if you offer the customer incentives for paying (such as a discount if payment is received within a short time frame), rather than threatening the penalty of late fees. You also can’t really predict whether late fees will force a customer to cough up the money they owe you if you don’t know why the customer is paying late.

If your customer contracted for services but is not able to pay, have it in mind that the circumstances may govern your response. Maybe the customer has hit a temporary tough patch, and all that is required is a reasonable payment plan. If that same customer continues to pay late, though, you may want to explain politely that you don’t work for free and move on.

Also, note that some customers pay late because they can. If you are a small business, large customers may realize they hold all the cards and withhold pay just for the heck of it. Others might simply view your invoice as low priority. In both cases, you may have to remind your customers that you are not in the business of extending credit. Always be ready to let these customers go.

Finally, some customers refuse to pay because they are angry. In this case, the temptation may be to escalate the conflict, but in fact, you should do the opposite. Take your time to find out why the customer is angry, and go out of your way to fix the problem. You may even choose to give the customer a cash discount — which could be well worth it if you retain the customer’s business and good will.

Charging late fees is not the only way to deal with delinquent accounts or overdue invoices. Note that by organizing your collection process and assigning an employee as a point person to reach out to late customers, you may be able to make payment arrangements. You can also create a script to help your collection representatives be consistent, and make sure they document every contact with the customer fully.

Assigning late fees is not always the best possible choice when you are trying to get paid on a delinquent invoice. Establish payment protocols and procedures ahead of time, and try other routes to get paid. Be clear from the beginning about your invoicing procedures so your customer knows exactly what is expected.

4 Simple But Effective Ways to Ensure Clients Pay on Time

Note that establishing standard policies and procedures can help encourage customers to pay faster to keep your business cash flow moving. All these boil down to staying on top of your invoices, following up with customers, and having customer-friendly policies in place to make sure you get your money without alienating your customers. These procedures may include;

  1. Tracking Unpaid Invoices

Immediately you have the foundations of your accounts receivable in place, it is time to monitor the situation. If you have a lot of customers, then you run the risk of eventually facing late payments and uncollected accounts. Have it in mind that some businesses ignore these delinquencies or don’t prioritize them, and others focus on them on a regular basis.

Note that you can’t collect unpaid invoices if you don’t know you have them. That is where tracking comes into play. Create the habit of tracking invoices and following up on late ones. Even if you can’t collect 100 percent of your overdue accounts, doing something is better than doing nothing.

  1. Send Email Reminders

Indeed on-time payment from your clients protects your business’s cash flow, but if your clients lose their invoices or get distracted by other matters, they may forget to pay. To reduce late payments and tighten the payment term, it is imperative you send out email reminders, which offer a softer, less-direct approach to collections.

Note that these reminders go out instantly, unlike mailed reminders which add postage costs and take time for delivery. In addition, it is a non-invasive way to get your customer’s attention without making an uncomfortable phone call. You can send polite reminders to clients in case they simply forgot to pay.

In some situations, all a client requires is a gentle nudge to make the payment. You should also consider including a copy of the overdue invoice with the email to help remind the customer of the bill and give them the information they need to pay it.

Notably, online invoicing services often let you set up automatic email reminders if the invoice is not paid in a certain amount of time. With this option, you don’t have to spend a lot of time tracking down late payments and sending the email reminders manually. Your software handles the work for you, giving customers the reminders they need to get moving on their payments.

If the customer ignores your initial email reminder, it may be time to step it up and use stronger yet still polite and professional language. You should still keep the correspondence professional because it reflects on your business. However, it might be time to let the client know you are expecting your payment immediately and you plan to take action if the account doesn’t get settled.

Ensure you make the customer understand what you plan to do next. For instance, you might say, “If we do not receive payment by August 10, we will send your past-due account to collections.” That can be enough to encourage the customer to pay up so they don’t face any additional collections activity.

  1. Automate Your Invoicing

Have it in mind that automating your invoices and sending online invoices can help cut down on the chances of late payments. With these services, you are able to send out invoices quickly to encourage customers to pay right away.

When you invoice a customer right after the product or service gets delivered, it is fresh on your customer’s mind, and that can speed up payment. A lot of businesses offering this service let you issue invoices on the go and set up automated email alerts to remind clients when their account is overdue. Most of the systems also store your invoices in one place, so you can have a clear picture of those that have not been paid.

  1. Streamline Payment Options

Note that some clients intentionally let payments go beyond the due date because the payment options aren’t convenient. Have it in mind that expanding the payment methods you accept can help proffer solutions to some of the delinquent accounts.

Look at the payment options you give your clients now. Do you offer several options or only one? Consider opening it up to other payment methods if the options are limited. This includes cash, cheques, credit cards, electronic funds transfers, wire transfers, or payment remittance through third-party systems.

Always remember that flexibility in how you receive your clients’ payment information can also help. Some customers tend to find it easier to provide credit card information over the phone or physically deliver a cheque to a location other than your main storefront.

Conclusion

Charging late fees may not be the only way to deal with delinquent accounts. By organizing your collection process and assigning an employee as a point person to reach out to late customers, you may be able to make payment arrangements. Consider offering incentives for early payment, and offer payment plans upfront. You might demand 50 percent of your fee before you start on a new project, invoicing for the remainder when you deliver.

In addition, always be clear from the beginning about your invoicing procedures so your customer knows exactly what is expected. Assessing late fees is not always the best possible choice when you are trying to get paid on a delinquent invoice. Create payment protocols and procedures ahead of time, and try other routes to get paid.

Joy Nwokoro