Should You Charge Late Payment Fees On Invoices?

December 24, 2021

Small business invoices may not always look alike, but the information on all of them is generally the same. After filling out your personal information, scope of work, total cost plus any additional tax, you’ll likely see the option to bill for late payment.

Is it okay to charge late fees for my Small business invoices? After you enter your personal information, the scope of work, the total cost, and any additional taxes, you’ll likely see the option to invoice for late payment.

Charging for late payments is often part of the payment terms of your contract and is practiced by many small business owners, especially since it means you are more likely to get paid sooner by your client.

In this article, you’ll get an overview of why you should charge late fees on unpaid invoices. It can make financial sense for your business and how to go about it the right way.

Why charging late payment fees can be a good idea

Generally, invoiced bills are paid within 30 days. However, if you are a freelancer or outsource your services, it may take your client even longer to pay you. Not getting paid on time is a frustrating problem that is, unfortunately, all too common for many small business owners.

If you are tired of waiting weeks or even months to get paid for your services, charging late fees could alleviate some of your discomfort. Here is why:

  • You’ll get paid sooner—Late payment fees could persuade the client to pay you on time, or risk paying you more in the process.
  • They show you mean business—Late payment fees show that you, as a small business owner, won’t tolerate being taken advantage of, especially when you deliver your end of the bargain!
  • You might make even more money—After sending your invoice, you’ll be paid, regardless. But if you add those late payment fees and the client doesn’t respect your payment terms, you might even make more money.

Can you charge interest on unpaid invoices?

If you have not yet received payment, you might consider charging interest on top of the amount you have already billed. Charging interest on unpaid bills is perfectly legal as long as you follow the law.

Maintaining a good relationship with your client should always be your main focus, because you do not want to jeopardize the business relationship because of a few extra dollars. However, if you plan to charge interest on unpaid invoices, make sure that the amount to be charged is clearly stated on both the original invoice and the contract so that all parties understand the terms of the agreement.

What should you include on an invoice for payment terms?

Your payment terms should be clearly defined. Most importantly, they should include the price for the completed project (whether it is an hourly rate or a fixed fee), the payment terms (e.g., net 30 or invoice due date), and how the client can make payment.

For example, if you want a check mailed to your home or business address, include the appropriate information, including the zip code. If you prefer direct deposit to a bank account, you will need to provide your bank information, including the branch number, institution number, transit number, and finally the account number.

It is important to remember that payment terms and late fees are two completely different things. Payment terms refer to when and how you want to be paid, while late payment fees are a friendly but emphatic reminder to your client that financial penalties are imminent if they do not pay on time.

How long should you give someone to pay an invoice?

Opinions vary on how much time you should give someone to pay a bill that is due, but they range from “net 10” to “net 90” or “net 120”. “Net 30” is the most common payment term. This means that payment is due 30 days after the invoice is submitted. Some invoices also contain a clause with “payment on due date.”

For small business owners who work with the same clients on a rotating basis, you may be able to offer some flexibility in your payment terms. Ultimately, if you have the cash flow, this can only help strengthen your existing business relationship. For example, if a client you have already worked for asks for a 10-day payment term on your net 30 invoice stamp, you might consider this as you are likely to collaborate on further projects. Giving clients a month to pay you is a common practice and a good starting point. Too long a span could be challenging, especially if cash flow is tight and you need revenue as soon as possible.

Setting payment deadlines ensures that the customer knows they must pay by a certain deadline, and that late fees may apply if they do not.

How much can you charge for late payment of invoices?

There is no golden rule for how much you should charge for late payment of a bill, but there is a maximum amount that you are legally entitled to. A lawyer can help you determine a reasonable percentage and include it in your payment terms in the contract you send your clients. One thing you should always remember is that charging late fees should never be viewed as a means to make more money from your client. Rather, it should be an incentive for your customers to pay you on time.

What is the standard late fee on an invoice?

Standard late fees and maximum statutory late fees are two different things. Maximum fees vary by province, but as a starting point, many small businesses charge between 1.0 and 1.5 per cent per month on the rate charged. It’s important to remember that the rate you charge on the late fee invoice should always match the details of the original contract to avoid confusion and potential legal issues.

How do you calculate late fees on invoices?

Calculating interest on an invoice for late payment is relatively simple. You can either calculate these percentages manually or, if math is not your strong suit, download accounting software that will automatically add the percentage to your total. Do not forget to keep these charges in a personal spreadsheet with your original purchase orders so you have a record of any changes to your invoices come tax season.

3 tips for charging interest and late payment fees on on

Charging interest and late fees on top of your regular rates could mean the difference between being paid on time or waiting for weeks or months to receive compensation for your services! The following tips will show you how to charge interest and/or late fees without hurting business relationships, or taking up too much of your own time.

Charging interest and late fees on top of your regular rates can mean the difference between getting paid on time or waiting weeks or months to be compensated for your services! The following tips will show you how to calculate interest and/or late fees without damaging business relationships or taking up too much of your time.

1. Hire an accountant or use accounting software.

By hiring a trained accountant to calculate late payment interest, you can be sure that no errors will be included in your invoice and that all legal requirements will be met. Most accounting software has preloaded invoices as well as late payment interest calculators embedded in the programming.

2. Calculate the best interest rate

Do not just guess or pick a random number. Decide on a fair and reasonable rate by determining the annual interest rate first,

3. Get all the necessary forms and paperwork.

If a customer does not pay you on time, you can also first try sending what is called a demand letter. These are essentially letters in which one party asks the other (the customer) to pay before taking legal action or claiming late payment fees.

Charging late fees on invoices is not mandatory, but it can help ensure that you get paid on time for your services. If you plan to charge your client additional fees, you should always clearly outline the terms of the business arrangement in a contract.

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