Charging Late Fees on Unpaid Invoices

How to Charge Late Fees on an Invoice and Get Paid Faster?

Waiting to get paid is no fun. Agonizing over whether you need to come up with invoice late fee wording is misery. You’re not alone if you’ve struggled with charging late fees to clients. It’s challenging, especially when you haven’t done it before and you don’t have a script to use. With this guide, you’ll be able to get paid fairly for the work you’ve performed.

How to charge late fees on an invoice and get paid faster:

  1. What is an invoice late fee?
  2. Late payments are a warning light in your business.
  3. Are invoicing late fees legal?
  4. Should you charge an invoicing late fee?
  5. How to charge invoice late fees.
  6. Invoice late fee-wording.
  7. Tips to get paid faster.
  8. Could this one change eliminate your late invoice payment problems?

1. What Is An Invoice Late Fee?

In the simplest terms, a late fee is an additional amount a client must pay you for failing to pay the invoice on time. For example, your invoices may state that invoices are due for payment in 30 days. If the client pays you 50 days after receiving the invoice, there may be grounds to charge an invoice late fee.

While it is possible to charge late fees on your invoices, this business decision should be handled with care and planning. Surprising a client with a demand for late fees is unlikely to bring you additional money. Even worse, a surprise charge may upset a client and cause them to rethink doing business with you.

Before we explore the details of contracts and the details of invoice late fee wording, let’s take a step back and look at what late payments signify.


2. Late Payments Are A Warning Light In Your Business

Imagine you have 10 clients, seven of whom pay you on time. The remaining three clients only pay you after sending multiple reminders. Everyone makes mistakes once in and while. However, if a client regularly pays you late, that is a warning signal you should not ignore. It may tell you that the client does not value your contribution. Or the client may lack the organizational skills or systems to manage their invoices effectively.

Think of invoice late fees as a temporary bandage. It is fine to use a small bandage when you have a cut. More drastic measures may be warranted when you get a larger injury – like multiple clients paying you late month after month. Start by asking the client about the situation and ask them if you can make the invoice payment process easier. If the client refuses to work with you, you may need to end the relationship. Spending time chasing down disorganized clients is no way to grow a business.

With that point covered, let’s consider the legal aspect of charging late fees on your invoices.


3. Are invoicing late fees legal?

While we cannot offer legal advice, we can point to common business practices. Many companies charge late fees or penalties to encourage customers to pay on time. It is crucial to check if your contract or agreement with the client specifically covers late payment penalties. Getting the client to pay the fee may be tough if your contract fails to cover this area.

The amount charged for late invoice fees varies widely. There are two popular methods – a flat dollar fee or charging based on a percentage of the amount outstanding. Here are a few examples:

  • Virginia Tax. Taxpayers in Virginia face the following penalty for late tax payments: “the late payment penalty is assessed at a rate of 6% per month, with a maximum penalty of 30%.”
  • AT&T. In some cases, the telecom company charges a $6.50 late payment fee for customers of its consumer-wired business.
  • Quickbooks. The accounting software company reports that companies typically charge a 1-1.5% late fee.

For example, a freelancer who has an unpaid $1,000 invoice might decide to charge a $50 late fee or 1% of the amount (i.e. $10 in this case). Assuming your contract clearly states that you may charge late fees to clients, that leaves a major question. Is it wise to charge a late payment fee?

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4. Should You Charge An Invoicing Late Fee?

Before charging a late payment fee to a client, there are a few important questions to consider. Examine these questions as due diligence – answering them thoroughly will increase the odds of successfully collecting a late fee.

4.1. Does your contract specifically state payment terms and penalties? 

If your contract does not have this provision, your client may object to the penalty and refuse to pay it.

4.2. Have you followed up with the client at least once or twice?

Your client may have gone on vacation, become ill, or disrupted their usual routines. Following up a few times using the following resource – 8 Polite Invoice Payment Reminder Emails That Work [Free Templates]  – is a smart way to encourage clients to pay their late fees.

4.3. Have you considered offering alternative payment options?

It’s possible that your client is not paying the invoice because they have limited money. Cash flow problems are a constant danger in business. Given that reality, it is worth offering some flexibility. For example, ask your client if they would prefer to pay your $1,000 invoice over four monthly payments of $250. Only make this offer if you think the client is trustworthy. This payment plan can reduce your cash flow, so it should be offered only rarely.

4.4. Are you planning to charge a reasonable late fee?

The reasonability for your invoice late fee is based on a few factors. First, compare your invoice late fee to those charged by other companies. If your late fees are significantly higher than other companies, your client may view the fee as unreasonable. Second, does your contract or agreement guide how and when late fees should be charged?

4.5. Do you accept the risk of charging late invoice fees?

Finally, asking a client to pay a late invoice carries some risk. Less sophisticated clients may feel insulted or ashamed by this demand because it highlights the fact that the client is disorganized. There is a chance that your relationship with the client may suffer if you charge a late invoice fee. However, if you have already taken other steps, like sending payment reminders or potentially offering payment flexibility, then charging a late fee may be your best option.


5. How to charge invoice late fees

There are a few ways to charge invoice late fees depending on how you work with clients. For simplicity, let’s focus on two popular modes of client work: one-off projects and ongoing relationships.

Many freelancers run their businesses on one-off client projects (e.g. creating a new WordPress website for a business). Here is a practical scenario where you would decide to charge late fees.

  • Day 1: You send the project invoice to the client for $10,000. In the invoice notes, you remind the client that payment is due in 30 days and that you reserve the right to charge late fees, as per your agreement with the client.
  • Day 25: Send an invoice payment reminder to the client.
  • Day 29: Send another invoice payment reminder to the client.
  • Day 32-33: If the day 30 falls on a weekend or a holiday, your client may not pay you. That’s why it is often wise to wait a few more days before imposing late fees.
  • Day 35: Send an invoice payment reminder email and remind the client that late fees will be charged when the invoice is 10 days overdue.
  • Day 40: Send the late payment invoice for $100 (i.e. 1% of the invoice value)

The above schedule balances your need to be paid fairly with flexibility for the client.

The next example focuses on a freelancer with an ongoing service relationship with a client. For example, you might provide monthly JavaScript development support to help clients improve their web app’s performance. In this scenario, we’ll assume you send the invoice on the 15th day of the month.

  • Day 20: You prepare and send the monthly invoice to the client requesting payment by the 30th so that the monthly service can be delivered uninterrupted.
  • Day 29: Remind the client that the invoice is due for payment tomorrow
  • Day 32-33: If the day 30 falls on a weekend or a holiday, your client may not be at their desk and may miss paying you. Therefore, it is wise to wait a few days. 
  • Day 33: Send an invoice payment reminder email and remind the client that late fees will be charged when the invoice is 10 days overdue. In addition, remind the client that a failure to pay the invoice may result in a service interruption. 
  • Day 40: Send the late payment invoice for $100 (i.e. 1% of the invoice value). If the client has still not paid, inform the client that you are pausing all work on their projects until the last invoice is paid.

6. Invoice late fee wording

Despite sending multiple invoice payment reminders, you may still face a situation where the client has not paid the invoice. In that case, your next step is to review your agreement with your client. Specifically, review how the contract describes late fees. The invoice late fee wording you use should tightly align with the contract.

The following example, late fee wordings or scripts, can be adapted to various situations where you want to charge late fees. Use these scripts as a starting point. They will need to be further customized to your business, contract and client relationship. The words in all capitals should be updated to reflect your circumstances.

6.1. Invoice Late Fee Wording: “First Time.”

Everybody makes mistakes now and then in business. Therefore, you may want to take a milder approach in the first invoice late fee that you impose on the client. Before using this script, double-check that the invoice due date didn’t fall on a weekend or holiday.

Hi Client,

 

I’m writing to you about Invoice NUMBER which was due for payment on DATE. Normally, an invoice late fee of $100 applies to all late invoices. Since this is the first time this has happened, I’m reducing the late fee to $50. The late fee invoice will be sent in a few minutes.

 

To continue the project, invoice NUMBER and the late invoice payment fee must be paid in full. If you would like guidance on how to send a payment, please contact me. 

6.2. Invoice Late Fee Wording: “Repeat Offender.”

The following script may be useful when a client has paid an invoice late multiple times. In this case, requesting a meeting with the client may be wise to discuss the situation further. Setting up a meeting is especially important if the client owes you a significant amount (i.e. over $5000) or you have an ongoing working relationship.

Hi Client,

 

I’m writing to you about Invoice NUMBER which was due for payment on DATE. According to my records, this is the third invoice which has not been paid on time. As a result, I will be charging a late payment bill for $100. Until the outstanding invoices and late payment is paid, no further work will be performed.

 

To help prevent this from happening again, I’d like to request a meeting with you and the person that handles invoice payments. In my experience, late invoice payments can happen for a variety of reasons so let’s discuss it further and find a solution.

6.3. Invoice Late Fee Wording: Large Amount Outstanding 

When you find yourself in this situation, it is truly unpleasant. We’ll assume that you have used the other best practices in this guide, like sending multiple invoice payment reminder emails first. If a client continues to be non-responsive, it is time to take unusual steps.

Before using the script below, use the following techniques:

  • Call the client and discuss it.

You may not speak with clients on the phone when you work with clients on a digital basis. Picking up the phone and calling is a wise move.

  • Check the client and company on social media.

For a moment, give the client the benefit of the doubt. Maybe something unusual has happened in their life or at their company. For example, they may be going through a health crisis or have a family emergency. If possible, look up the client on social media to see if they have posted anything. Give the client another week before following up if you see signs of distress.

  • Contact a lawyer for advice.

In many cases, the cost of working with a lawyer on late invoice payments does not make sense for a freelancer. However, the logic changes when there is a significant amount unpaid. In California, a business can use small claims court for claims up to $5,000, which may be relevant to you. A short consultation with a lawyer is the best way to find out if legal actions are worthwhile.

Hi CLIENT,

According to our records, you owe $10,000 from the following invoices:

  • Invoice 100 (issued May 1st): $4,000
  • Invoice 105 (issued June 1st): $3,000
  • Invoice 110 (issued July 1st): $3,000

I have sent multiple invoice payment reminders over the past few months and have not received a response from you. As a result, I will send a late payment invoice for $300 to cover the three late invoices. If the outstanding amount is not paid within the next 5 calendar days, I will be seeking legal advice for next steps.

If you would like to discuss a payment plan or other payment options, please contact me immediately to discuss those questions.


7. Tips To Get Paid Faster

Ultimately, chasing down late invoice payments is not the best use of your time as a business owner. Implement these best practices to get paid faster and improve your cash flow over time.

7.1. Identify The Root Causes of Late Invoice Payment

Take a step back after you encounter late invoice payments a few times. Find out what exactly is causing payments to struggling to pay you. Are you dealing with disorganized clients? Are they struggling to issue you payments using checks or wire transfers? Depending on the pattern you find, you will find different systematic solutions.

7.2. Invest Time and Resources Into Business Development Every Week

Putting more time into business development (i.e. “client getting activities”) is one of the best ways to ease the anxiety caused by late invoice payments. Single late invoice payment is quite troubling when you only have three clients. On the other hand, if you apply yourself to sales and get 6 or 10 clients, a single late payment will have a much smaller impact on your cash flow.

7.3. Update Your Contracts And Onboarding Process

Setting expectations for timely invoice payment early is vital. Therefore, review your client agreements and onboarding checklist. For example, you may ask your clients to use CheckYa to pay you. However, what if your client is unfamiliar with the service and procrastinates taking a few minutes to learn how to use it? In that case, reaching out to the client and helping them learn how to use CheckYa may be more effective than demanding a late fee.

7.4. Update Your Preferred Payment Method For Speed

Late invoice payment can also be caused by slower or time-intensive payment methods like sending a check in the mail. That’s why we recommend using a flexible invoice payment method like CheckYa. Your clients can issue an online payment 24/7!


8. Could This One Change Eliminate Your Late Invoice Payment Problems?

The best practices covered above all have a role to play in preventing late invoice payments. As a business owner, you probably have limited time, though. Therefore, it’s best to ask yourself which change you could make that would have the biggest impact. 

Adding CheckYa to your business is one of the best ways to get paid on time. Whether you need to send one-off invoices or automated reminders, CheckYa can do it all. Sign up for CheckYa today – it might eliminate your business’s stress of late payments.

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