Late charges can encourage prompt payments while also reducing the impact of late payments on your cash flow. But the prospect of charging late fees can be daunting for many businesses. Wording payment terms and late fee policies can seem like a particularly difficult task, as these parts of your contract will determine whether any late fees are enforceable.
In truth, it doesn’t take a lawyer to create an enforceable late fee policy. While it’s important that your late fee wording is clear and precise, the rest is entirely up to you.
We recommend taking a look at late fee policy examples and then using a payment term template to do the bulk of the work for you.
In this article, we’ll explain the basics of late payment policy wording and provide some great examples to get you started.
Please note that the information found in this blog serves to inform but does not constitute legal advice. For information specific to your industry, we recommend contacting a legal professional.
If you’ve read How Much Can I Charge % For Late Fees?, you’ll already be aware of how late fees can be used to improve cash flow and increase efficiency in your business. But simply charging a late fee isn’t enough.
Important: Late fees, whether interest-based or fixed, are only enforceable by the court if your client has agreed to the late fee policy set out in your payment terms.
All businesses who want to charge late fees on overdue invoices need to ensure that they have provided clients with a clear description of their late fee policy and that it has been agreed to well in advance of any fee being charged.
Where you display your payment terms and late fee policy will depend on how you run your business.
Of course, there is a lot of variation in what your payment terms may cover. The policy for an online retailer will differ from an IT consultant, and the late fee wording on an invoice will be much briefer than the payment policy provided in your contract.
When wording your late payment policy, it’s essential to be clear about what you will charge. Will your clients be charged a fixed fee or interest? Will all clients be charged the same way? Will you treat a high-value invoice the same as a low-value invoice? Let’s take a look at the types of late fees you may charge and how they differ.
Fixed late fee
A fixed amount that is charged for late payment. Usually applied immediately after an invoice becomes overdue or at the end of a grace period.
Interest-based late fee
An interest rate charged on the balance of the overdue invoice. Usually applied daily until the balance is paid.
Combined late fees
A combination of a fixed fee and interest rate, usually with a fixed fee charged first, then interest charged after a set amount of days.
Now that you’re acquainted with the different types of fees you can charge, let’s look at some examples of how to incorporate them into your late fee payment policy.
A brief description of your late fee policy should be included on your order form, booking confirmation or invoice to remind clients of their agreement with you. This will not provide the full terms of your policy (see Expanded late fee wording) but serves as a prompt to encourage payment.
Invoice Payment Terms Example 1 (Fixed or Interest):
Thank you for your business. Please note that as per our specified payment terms, all invoices must be paid in full within [30] days of receipt. Overdue balances are subject to a late payment fee as agreed in your contract.
While the wording on your invoice only serves as a prompt and so doesn’t need to be too specific, the late fee policy in your contract should offer all the information a client could possibly need to know. Be sure to explain what your payment window is, what type of fee will be charged and any relevant rates.
Late Fee Policy Example 1 (Fixed or Interest):
All services provided are invoiced [at the time of completion] and are subject to a [30-day] payment cycle. If payment is not received within those [30 days], any overdue and unpaid balances will be charged [a fixed fee of $25] [interest at a rate of 3% per month, charged daily until the balance is paid].
Late Fee Policy Example 2 (Combined):
By signing this payment policy, you agree to settle all invoices within [30 days] of receipt. Any overdue or unpaid balances will be subject to a late payment fee of [$25] after the due date has passed. In addition, unpaid balances over $1000 will be subject to 3% interest per month, charged daily until the balance is paid.
Despite the best intentions, sometimes an invoice slips through the cracks, and a client forgets to pay it on time. For this reason, we recommend sending a reminder letter the day after an invoice is due. Most accounts receivable programs have customisable reminder letter templates, but be sure to mention late fees in your reminder letter for the best results.
Reminder Letter Example 1 (Pre-charge):
Our records show that we haven’t yet received payment of [$5,000] for [Invoice #1234], which was due yesterday. To avoid any additional charges as per our late payment policy, I would appreciate you taking a look at this on your end.
If you anticipate any issues making payment on this invoice, please let me know. If the payment has already been sent, please disregard this notice.
Reminder Letter Example 2 (Post-charge):
We have not received payment of [$5,000] for [Invoice #1234], which was due on [01/02/2022]. As per our payment terms, a fixed penalty of $25 has now been applied to the overdue balance, and interest will be added at a rate of 3% per month, charged daily until the balance is paid.
To avoid further charges, please settle the overdue balance at your earliest convenience.
Before you begin charging clients late fees, it’s essential to know what you can (and can’t) do within the laws of your country. We’ve created a range of helpful guides to help our clients all over the world. Learn more about the regulations and best practices where you live:
Denym is a software entrepreneur and writes about accounts receivables management for small business.
