Getting paid faster with late fees

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13th March, 2020

The waiting game: Are late fees a good idea in small business?

Long waits on invoice payments cause small business owners to wonder whether implementing a late fee is the answer. In this article, Nina Hendy breaks it down for you.

Small business owners spend vast amounts of time and energy chasing payments that exceed 30 days. Some wonder whether implementing a late fee when clients don’t pay promptly would be worthwhile.

It’s a fair consideration. A report by the Australian Small Business and Family Enterprise Ombudsman estimates that 90 percent of small businesses are failing due to cash flow problems, with one report revealing that 57 percent of businesses are using credit cards to try and offset late payments.

The same report also reveals that the vast majority of time-poor business owners spend less than five hours a week chasing down payments they’re owed.

The ASBFEO, Kate Carnell has said small and medium-sized businesses are commonly waiting an average of 56 days to be paid, which is an untenable situation for many.

And a recent survey of 1200 SME owners across the country found that businesses with a revenue of between $10 million and $20 million in revenue wait an average of 40 days to get paid.

Meanwhile, smaller businesses with revenues between $1 million and $10 million are waiting an average of 66 days to be paid.

READ: Basics of small business invoicing for beginners

At any given time, SMEs have a third of their revenue tied up in outstanding invoices. The end result is the stunting of Australian small businesses growth.

Regulators and industry watchdogs are investigating a legislative approach that requires big businesses to be more transparent about their payment terms.

Carnell also pointed out Telstra and Rio Tinto have voluntarily moved to 20-day payment terms for small business suppliers in recent weeks after mounting pressure.

“The bottom line is that all businesses should be paid within 30 days,” said Carnell.

The waiting game to get paid raises questions about whether small businesses should consider adding a late fee to their invoices.

Designed to incentivise clients to pay quicker, a late fee can vary between five percent and 20 percent – although there are mixed thoughts on whether it’s a good idea.


How to implement a late fee


Fiona Hamann is the director of a communications firm north-west of Sydney, Hamann Communication, with clients of all shapes and sizes, including small businesses.

She adds a five percent late fee to her invoices, which accounts for the cost of her time to chase clients with follow-up invoices.

Hamann sends a reminder invoice one day after an invoice falls overdue, following up a couple of days later. After a week, she reminds them that a late fee will apply. Generally, the client response and lets her know when payment can be expected.

READ: 5 methods to improve cash flow

Hamann sends up to 10 invoices per month, and in six years, she’s only charged one client a late fee.

“I want the fees to be enough of a deterrent for clients to think twice about making late payments, but not enough that I’m seen to be profiteering from them. I also want them to reflect a fair figure based on costs for my time to pursue the late invoice,” said Hamann.

She points out that late fees and debt collection costs need to be approved by clients in the initial contract and can’t just be tacked on without notice, so she lays it all out in her client contract.

“I’ve found that since I’ve included late fees in my contract up front, and they need to agree to it, clients are more aware, and also more communicative about late payments,” she said.

“Ultimately, I want to maintain a good client relationship and ensure I get my agreed invoice amount, and I’m not interested in the late fee. I have it there as a deterrent, and it works.”


Don’t be overzealous when introducing late fees


Christian Borkowski is the director of financial advisory firm, PrimeAdvisory.

While implementing late fees is often discussed with clients, it’s rare among small businesses because of the risk to valued client relationships. It’s also more difficult for smaller businesses with limited resources to enforce, he adds.

It’s important to consider implementing late fees carefully. If someone isn’t paying what owed, and then you increase it more, it can make being paid even more unlikely, he points out.

“What I’ve seen with clients over the years is that there’s a significant risk of damaging client relationships if you do charge interest or late fees on late payments,” said Borkowski.

Consider what’s industry norm when it comes to deciding whether to charge late fees or not.

“My view is that a small discount for on-time payments is less expensive in the long-run and you can adjust your pricing slightly to mitigate any expense related to the discount and maintain your profitability.

“It’s a more positive way of incentivising on-time payment,” he said.

Alternatively, you could charge upfront to avoid the need for late payment fees if its common in your industry and likely to be acceptable to your clients, Borkowski adds.

Davie Mach is the director of Sydney accounting firm, Box Advisory Services. In his experience, late fees are typically more common among small businesses with recurring business models, such as subscriptions or monthly billing.

“In cases where a late fee is enforced, having appropriate communication channels to discuss this and the discretion to waive or adjust based on the outcome is important.”

He adds that prevention is better than cure.

“Make every effort to have your clients and customers pay on time.

“And in cases where a late fee is enforced, having appropriate communication channels to discuss this and the discretion to waive-adjust based on the outcome is important,” said Mach.

 

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