Charging late fees and offering discounts for early payment may seem like a no brainer to you but in fact there are differing opinions. In general, I’m not a fan of either.
Our friends over at The Kaplan Group argue in favor of late fees and against discounts for early payment. Their experience with discounts is much the same as my own. Late payers take discounts! In my opinion the additional accounting and collections burden added to the irritation factor (so annoying when a customer pays at 90 days and takes a discount – and even more annoying when a righteously ticked off owner asks you to collect them) makes it not worth the trouble.
Nevertheless, there is a time and a place. If you need to raise some quick cash a timely discount on a large invoice might do the trick, but I would avoid routinely offering them.
I both agree and disagree. In general I think it’s a bad idea to charge late fees. Most customers won’t pay them. You wind up irritating customers, which no one wants to do (almost) and again, you create an unnecessary accounting and collections burden. Neither charging late fees or offering discounts significantly impact how fast customers pay. (If you want to learn about collecting faster read my shameless pitch below).
… and it’s big but, you have to include a statement on your invoices, statements, late notices etc that says you charge late fees and how much you charge. That sounds contradictory, but it isn’t. If you don’t have it written on documents you deliver to your customer i.e. invoices, statements, contracts and late notices, you probably won’t be able to collect the fees should you ever land in court with your customer. If you do end up in court you’re going to want those fees.
I know, I know, you have good long time customers and they never pay late – and yet, though I’ve heard that from virtually every customer and/or prospect I’ve ever spoken to I remain in business doing collection work all day as do another 4400 collection agencies across the country. Somebodies paying late out there and somebody is going to court!
Include it! Not only will it serve you if you ever have to sue, it’s an important negotiating tool in the collection process – whether you’re collecting yourself or sending it to a collection agency. It doesn’t have to be a big deal, something like:
“Terms are Net 30, a 1.5% late fee will be applied monthly to all late invoices”. If you really want to be smart add “or the highest rate allowed by law”.
Shameless pitch up next –
For more on late fees, discounting and additional sample statements you can pick up a copy of my Credit Collections Manual “How to Clean Up Your Receivables and Get Paid Faster Now” The 2009 Version is available here at 2009 prices. With it you’ll receive lifetime updates free. So, when I finish the 3rd Edition which I’m almost finished with, you’ll be the first to receive a copy. While everyone else can pay the 2019 prices!