How to Develop & Explain Late Fee Invoice Policy to Clients

Late payments are detrimental to any business. They negatively affect the flow of your production and ultimately impact your business operations. As such, it is crucial to understand how to properly employ precise and clear invoice late fee wording to develop an unambiguous late payment policy for your business.

You can impose late payment fees on your clients or customers in different ways. At the same time, you must ensure that your late fees fall within legal constraints and uphold customers’ rights.

If you need guidance on developing a late fee policy that resonates with your business and your customers, this article will guide you.

Let’s start!

Key Takeaways

• Invoice late fee wording is important to unequivocally describe the different conditions and rates in a business’s late fee policy.
• Late fee charges vary per state. You must also consider whether you are catering to freelancers and contractors, consumers, or businesses.
• Flat rates, compound interest, and hybrid rates are different methods for calculating late fee penalties.

How to Develop a Late Fee Policy

A late fee policy covers specific courses of action a business takes when customers fail to settle their payments or balances on or before the set invoice due date.

You need to consider the business structure, the customers, and the circumstances or conditions surrounding the transaction.

Invoices alone do not have any legal bearing, so including your payment terms and attaching a contract to specify the conditions and scope of your services adds more weight to holding customers accountable for their payment obligations.

A monthly invoice late fee percentage of about 1% to 2% is considered reasonable for late fees.

Give customers enough leeway to review the contract or policy that oversees the transaction and the payment terms.

Why is a Late Fee Policy Important?

A late fee policy is crucial because it is meant to protect businesses from non-payments and bankruptcy. Improperly handled late payments could lead to severe financial losses for the company.

Once a business has carried out what the customer has ordered, it must replenish the funds used to produce the goods or services to balance its costs and expenses with its profit. Businesses also have to compensate their employees.

Late fees are not punishments; they are imposed as damage control for businesses.

Unpaid invoices technically become debts that customers owe to a business. It’s simply unfair when the companies have already provided the services or products and have not received the proper payment in exchange on time.

How to Explain a Late Fee Policy to Customers

The best way to explain a late fee policy to customers is to find the fastest and easiest way to communicate important information about their purchase. You can add your policies for late payments to every invoice as part of your payment terms.

You can also make the payment terms more accessible to all new and existing customers by keeping the terms on a prominent and permanent page on your website.

Take the time to assess whether it is best to communicate your invoice late fee wording before commencing the transaction. In this manner, you can introduce any discounts you may be offering for early payments.

Furthermore, avoid using invoice late fee wording that is too complex for your customers to understand.

How Much Can You Charge For Late Fees?

Determining the amount you can charge for late fees will depend on the statelaws governing your business location.

Each state has a (legal) maximum invoice late fee that business owners must follow, as shown in the table below:

Applying late fees to invoices also depends on whether your business caters to consumers, other companies, or freelancers:

On the other hand, if you want to implement a more comprehensive late fee policy, then consider the following methods on how to calculate late fees on invoices:

#1. Flat Rate

A flat rate entails charging clients a fixed weekly or monthly rate. The flat rate applies until the client settles their unpaid dues. The advantage of using a flat-rate late payment fee is that it is simple and easy to calculate.

Make sure to align your flat rates with the service's or product's price to make the charges reasonable.

#2. Compound Interest

Compound interest is suitable for severely overdue invoices. It involves charging interest on the outstanding payment. Combine the interest and the due amount with the accumulated fees.

#3. Interest Rate

Businesses looking to implement uniform or standardized late fees on all overdue invoices will benefit best from using interest rates. Interest rates are standard among companies and charge an additional percentage depending on the amount the customer owes.

The additional interest is added monthly, weekly, or daily after the payment due date.

#4. Hybrid Rate

Hybrid rates combine a standard flat rate with a compound interest rate on late payments. For instance, you can charge customers an additional $25 10 days after the payment deadline.

You can impose additional interest on the unpaid invoice if the overdue balance remains unsettled.

What Qualifies as Late Payment?

A payment qualifies as late or overdue if it remains unsettled beyond the set payment deadline. Well-defined invoice late fee payment terms effectively curb instances of overdue payments.

Often, the lack of an established policy for late fees or confusing invoice late fee wording is why customers don’t settle their balances on time. Aside from preparing a comprehensible late fee policy, you can also enable different payment methods for your customers.

Some payment channels worth trying include cash, check, credit or debit card, mobile, and online payments. Providing customers with options for paying their balances underscores flexibility and convenience.

How to Communicate Late Fees With Clients

There are different ways to explain late fees to customers, particularly your company’s invoice late fee wording and terms.

Below are sample templates you can use when sending initial, follow-up, and final late fee notices or emails:

Late Fee Email Example

The initial email should be simple and light and convey a friendly tone. Think of the initial reminder as a gentle nudge to let your clients know they missed the invoice deadline and still have enough time to settle their balance.

Sample template:

Subject line: [Your Business or Company Name] Overdue Invoice [Invoice Number]

Dear [Client’s Name],

Good day. This is a friendly reminder that your payment for invoice [invoice number] is now past due. The invoice was issued on [Invoice date], and the payment was due on [invoice or payment due date].

We have attached a copy of your latest invoice and a summary of instructions to guide you in settling your balance. Please do not hesitate to contact us for clarifications and questions about your invoice.

Otherwise, please disregard this email if payment has already been made.

Kind regards,

[Company or business name]

Late Fee Follow-Up Email Example

After sending the initial late fee email, the client still needs to settle their overdue payments. A follow-up email is typically sent at least 14 days after the initial reminder.

Note that a follow-up email must be firmer in tone and prompt immediate action on the client's part.

Sample template:

Subject line: [Your Business or Company Name] Overdue Invoice [Invoice Number] - Follow-up Notice

Dear [Client’s Name],

This is a follow-up reminder regarding your invoice [invoice number], which remains overdue despite our initial reminder. The payment was due on [payment due date] and is now past due for [number of days or weeks].

We would like to remind you of our existing late fee policy, which elaborates on applicable late fee charges should you fail to settle your payment by [date]. Please note that your outstanding balance will incur additional charges if left unpaid.

We have attached an updated copy of your invoice to this email. Please let us know if you need any clarifications regarding your payment options so our team can assist you directly.

Kind regards,

[Company or business name]

Late Fee Final Notice Email Example

The late fee final notice serves as a final warning for delinquent accounts. It must exude a strong sense of urgency and finality to spur the client's quick response or action.

At times, you may also have to emphasize the key components of the invoice late fee wording used in your late payment policy. For instance, you can highlight applicable charges or specific conditions in the contract that the client violated by failing to settle payments before the due date.

Sample Template:

Subject line: [Your Business or Company Name] URGENT! Overdue Invoice [Invoice Number] - Final Warning

Dear [Client’s Name],

Please be advised that your account/invoice [invoice number] is [number of weeks or months] overdue. Your balance currently stands at [provide the combined outstanding balance plus incurred late fees].

Despite our consistent reminders, payment has yet to be made. We will refer the matter to a collection agency if we do not receive payment within [number of days].

We may also seek legal action should your balance remain unfulfilled. We require your immediate action to settle your payment and avoid additional charges.

Please see the attached copy of your updated invoice. Kindly confirm receipt of this email and invoice and inform us when we can expect full payment of your invoice.

Kind regards,

[Company or business name]

What to Do if The Invoice Still Hasn’t Been Paid?

Here are some of the best practices to carry out in case an invoice or outstanding balance remains unpaid:

• Send consistent reminders. Keep the reminders short and straightforward, and attach a copy of the customer’s invoice. Send email reminders periodically until the customer settles their invoice.

• Charge prepayments. Charging prepayments is helpful for businesses that supply raw materials to fellow business owners or sell wholesale products. You can also issue an advance invoice to request initial payments from customers before delivering their goods or fulfilling their orders. Advance invoicing is ideal if you specialize in tailor-made or made-to-order products.

• Negotiate. Try contacting the customer via email, phone call, or text. Then, provide them with options on how to settle their balances. For instance, a customer has not paid their credit card bill for over six months. Some banks offer to have the client pay a specific percentage of the overdue payment to close their account permanently.

• Hire a collection agency or a debt collector. A collection agency specializes in following up on late payments. Their services are helpful if you have a massive amount of debt. Before hiring a collection agency, consider their rates and how they will affect your business’s finances.

• Seek legal action. Seek legal action or advice if the overdue balance escalates and the customer refuses to cooperate despite your efforts to reach out and meet them halfway. Otherwise, the customer may have valid reasons for refusing to settle their payments. They may want to dispute discrepancies with their purchase or the services they received.

Late Fee Policy Best Practices

Below are additional late fee policy best practices to equip your business against delinquent accounts or notoriously late-paying customers:

#1. Do Research

Check out how similar businesses in the market settle late payments and choose invoice late fee wording for each transaction.

Using fellow businesses as your reference gives you deeper insight into constructing invoice late fee wording for your policy that adheres to your business and your customers’ needs.

#2. Inform the Clients Ahead

Let your clients know that your business has existing rules for late payments. You can do this by enumerating late fee terms oninvoices or attaching the terms to your service contract.

#3. Use an Online Invoice Generator

Businesses handling multiple orders will benefit significantly from using an online invoice generator.

Online invoice generators allow businesses to create and issue several invoices quickly. The generators use ready-made invoice templates that you can fill out easily and a built-in calculator that lets you calculate the total amount plus applicable taxes or discounts.

#4. Offer Incentives

Incentives encourage customers to settle their payments on or before the payment deadline.

An excellent example of this is the use of payment terms such as 2/10 net 30. The payment term offers customers a 2% discount for payments settled within 10 days before the deadline, or 30 days from the date the invoice was issued.

#5. Allow a Grace Period

A grace period allows customers to settle their payments without incurring penalties or interest on their outstanding balance. The grace period will depend on the existing state rules governing your business operations, the nature of your business, and your clientele.

#6. Use Simple Language

Your invoice late fee wording should be based on simple language that your customers will understand. This is especially true if you are catering to consumers or regular customers.

In reality, customers only scan your payment terms. As such, you need to ensure they can grasp your late fee policy at first glance. Technical terminologies and complex business jargon are more acceptable in B2B transactions.

Final Thoughts

Preparing a coherent, user-friendly, and straightforward late fee policy is the key to reducing late payments and preventing your business from losing money over time.

Always consider the structure and nature of your business, your target customers, and the clarity of your invoice late fee wording to guarantee that your payment terms are communicated aptly to your clients.

Invoice Late Fee FAQ

#1. Are late payment fees legal?

Yes, late payment fees are legal. Late payment fees come with a complete set of invoice late fee wording or terms to protect business owners and contractors from significant losses caused by late payments.

#2. How much interest can you charge on an unpaid invoice?

The interest you can charge on an unpaid invoice will depend on applicable state regulations, the bill amount, and the type of service or product sold to the customer.

#3. How to calculate late fee interest rate?

There are different methods for calculating late fee interest rates. Some examples include adding a flat or universal rate for all invoices, charging additional interest on the outstanding balance, and incurring late fees.

#4. How do you introduce a late payment fee?

Introduce a late payment fee to your customers by using simple and easy-to-understand invoice late fee wording choices or making your service and payment terms accessible on your business website or page.

#5. How to inform a client of a late payment fee?

Send an overdue invoice letter to inform clients of their late payment fee. Attach a copy of their latest invoice along with information about the payment deadline, interest rates, and possible penalties should the customer fail to settle payments within a given time frame.