Typical Late Fee For Invoices: What You Should Know
Imagine this. You spent weeks working on a project for a client, completed it, generated your freelancer invoice, sent it out, and your client doesn't pay you.
As a freelancer, late payments from clients are the bane of your existence. They can be huge time-wasters, forcing you to constantly follow up with clients on unpaid invoices. Understanding how to handle them is crucial for thriving in your career.
Naturally, you may want to receive your payments with minimal hassle and expense. After all, when you’re an army of one, you bear the risk of more uncertainty. Chances are, you struggle with the feast and famine syndrome, like most solopreneurs.
Luckily, there is a way to avoid the stress of constantly chasing your money. Enter the typical late fee for invoices. Enforcing a late fee policy can help save valuable time, encourage on-time payments, and promote healthier relationships with clients.
What is a late fee?
Late fees are additional charges that you enforce on overdue invoices. When you add a late fee to your invoices, your clients pay an additional amount on top of the original payment, if they delay your funds.
Late fees play a huge role in discouraging clients from delaying your compensation -- a major problem that most freelancers experience. In fact, research shows that almost 43% of solopreneurs find it difficult to collect money for work done. By charging these fees, you can ensure your freelance cash flow remains streamlined.
When implementing a late fee policy, you have to specify a duration. For instance, you can include terms like net 20, net 30, or net 90. Net 30 is the most popular for small businesses, which requires customers to pay within a 30-day grace period of you providing your service. You also need to include the preset date; it will help you track lateness.
Some freelancers offer payment plans for big invoices. Completely up to you.
Generally, late fee policies come in two forms:
1. Flat fee or rates
These are fixed amounts that you add to the invoice if you don’t receive your payment on the agreed date. You can come up with any amount that suits your business.
For instance, you can enforce a rate of $15.00 every month for unpaid invoices under $200.00. Even though this amount may seem meager, it can go a long way in ensuring you get paid promptly. Your customers may want to avoid the hassle of processing your invoice two times.
2. Percentage rates
These are percentages of your total invoiced amounts. You can add them to the outstanding balance in each month that your client doesn’t pay you. To give you a better idea of how these rates work, here’s an example:
Let’s assume you enforce a 3% monthly rate for outstanding balances. You provide services worth $400.00, but you haven’t compensated yet after 30 days, even though your invoice clearly states the “Net 30” condition. In this case, you’ll have to charge $12.00 for that month and keep adding it for every 30 days after invoicing that your amount remains unpaid. So if the client eventually pays after 90 days, you’ll charge him a total of $436.00.
Alternatively, you can implement an annual percentage rate. Let’s say, for example, your annual interest rate is 15%. Unless your client delays your compensation for exactly a year, you’ll have to convert this 15% rate to a monthly one.
If your invoice worth $1000.00 remains unpaid for two months, you’ll need to multiply your newly-found monthly percentage (1.25%) by the outstanding amount. You’ll then multiply the result by two to get the late fee amount for this specific client. In a nutshell, you’ll charge them $25.00, and the new balance will be $1025.00.
What is the typical late fee for invoices?
Maximum late fee amounts vary from state to state, as they’re dictated by the prevailing usury laws. These laws set caps on interest rates to protect customers from rip-offs. Ensure you follow them, so that you avoid experiencing any legal problems.
Generally, however, the typical late fee for invoices among freelancers is roughly 1.5% monthly interest. While the 1.5% rate may hardly burn clients’ pockets, it often works effectively. For the most part, it’s motivating enough to encourage customers to settle their debts, without making them feel swindled.
Charging higher percentages may sometimes lead to clients negotiating for lesser rates. As a freelancer, spending time at the negotiation table can be costly, given that time is your most valuable asset. You’re better off negotiating the prices of your services and the value you provide to potential clients.
Remember, though, that you’re free to set your own fees. Depending on your industry, 1.5% may not satisfy you, and it may be in your best interest to increase this figure.
The best part about being a freelancer is that you’re in the driver’s seat most of the time. You’re free to set any percentage, as long as it’s in accordance with your state’s laws. Try finding out the amount other people in your industry are charging, then you can decide on a rate.
How can you charge late fees for invoice payments?
After finding out the amount to charge, your next course of action should be to notify your clients. Giving them a heads up early enough is crucial as it gives them ample time to prepare their payment schedules. Ambushing them with a fee out of nowhere can sever your ties with them.
After reaching an agreement with each client, you should then add the payment terms and conditions to your invoice. It’s advisable to also include your new policy in all future contracts with potential clients. By doing so, you’ll ensure all clients are on board with your policy from the start. And because your contract is legally binding, make sure every detail is clearly stated. Make sure the wording on both your invoice and contract matches. The due date and interest rate should both appear in the documents.
Consult with a lawyer for legal advice if your client refuses to pay or are having a really difficult time receiving your payment in a timely manner.
Important details of your payment policy need to be easily noticeable on your invoice. New clients should know this information by only taking a glance at your documents. Make the details stand out by mixing different font colors, and writing the most important parts using bigger fonts.
When enforcing your policy, make a habit of sending reminders. For example, send an email to your client a day before the deadline. Ensure the email is professional and straight to the point. Include your invoice details and the total amount due on the subject line. You can also send payment reminders once the deadline passes. In such a case, make sure you link to the invoice where clients can pay with their credit card in your email.
Most late payments often arise due to forgetfulness. Sending quick reminders informing customers of their possible charges can help make your invoice payment a priority for clients.
How can late fees help your business?
The most obvious perk of charging late payment fees or charging interest is that it encourages on-time payments. No client likes paying extra money, especially if they’d have paid a lesser amount if they’d release funds more quickly. This late fee, regardless of the amount, can be the incentive for clients to always pay promptly.
The truth is customers will often choose to sort out late-fee invoices first over other invoices with no extra charges. So in a way, you’ll have an edge over other freelance businesses.
To some extent, late charges make your brand seem more professional in the eyes of clients. They help customers associate your business with reputable companies that also enforce similar policies. Such policies communicate to customers that your payment standards reflect on your business’ professional values.
Another benefit of late fees is that they give some much-needed relief, compensating you for your efforts when seeking payments. Even though a few bucks may hardly change your life, they can at least reimburse you for the few minutes you spent producing other invoice reminders. As a result, your workplace morale improves, and you’re less likely to feel disheartened when chasing debts.
Handle late payments strategically
You don’t have to enforce the late fee policy every time. Your client may be facing personal challenges, such as illness or a tanking business, and charging extra charges may be in bad taste. Especially at a time when businesses are struck by Covid-19, you risk damaging your relationship, losing valuable opportunities in the long run. Empathize with your clients by waving the fee.
Consider other ways of rewarding on-time payments. For instance, you can offer small discounts for invoices paid early. You can then adjust your prices to accommodate the new discount so that you continue earning the same amount.
You can also request clients to pay you a certain amount before you start working on projects. For example, you can include a policy that requires them to pay upfront 40% of the overall fee. They can then pay the remaining 60% when they’re satisfied with your completed work. Always communicate to customers on your invoice policies beforehand, so they can know what to expect.
Remember keeping your clients happy should be your number one priority. Make sure you strategize when charging late fees. Sometimes the finance charges are worth waiving, especially if they come at the cost of your customers.
Chasing late payments can be a chore for most freelancers. It costs you both your time and effort. And as most savvy small business owners know, wasting time means you're losing money. You'd be better off spending that time serving other clients and increasing your workload. Charging late fees allows you to save your energy following up on delinquent clients.