After five years in the freelancing game without ever charging a late fee, I'm now giving it serious thought, spurred by a streak of delayed payments at the end of last year.
The culprit behind these delays? Good ole paper checks. I don’t understand how businesses, in a vastly digital world, still pay vendors via check, but here we are. I mean, c’mon — it’s 2024, not 1924. (Maybe I’m bitter because I’ve written content for digital payment processors, so I know there are better alternatives out there.)
As freelancers, our financial planning hinges on expected payments. Delays can disrupt everything from bills to investment plans. It’s like mapping out a trip, only to find the roads constantly shifting. It’s a little stressful and a lot annoying.
Which begs the question: should we charge for late payments?
Let’s dissect.
Pros and Cons of Charging Late Fees
Pros:
- A late fee can serve as a deterrent, encouraging clients to adhere to payment deadlines.
- It’s only fair to be compensated for the inconvenience and potential cash flow disruptions caused by late payments.
Cons:
- Introducing late fees can strain client relationships, especially if not handled delicately.
- Just as a child might not change their behavior despite losing their allowance, a late fee doesn't necessarily guarantee timely future payments.
Late fees, in my opinion, should be communicated and established upfront — ideally in a contract. Otherwise, have an open and honest conversation with your client. Discuss how delayed payments affect not just your business operations but also your personal livelihood. It's about framing the situation in a way that emphasizes partnership and mutual respect. If a client genuinely values your services, they should understand the rationale.
What Should Freelancers Charge for Late Payments?
We can debate the merits of charging late fees, but we’re still left with another question: How much should late fees be?
A quick Google search suggests that 1.5% to 2% interest per month is a standard late fee. That would translate to $15 to $20 on a $1,000 invoice, which, frankly, feels low. Perhaps a fixed dollar rate (like $50) would be more incentivizing for smaller invoices below a set threshold.
Whatever you choose, the fee should be significant enough to incentivize timely payments but not so high as to seem punitive. On top of that, when you lay these terms out in a contract, it’s important to clearly communicate how and when the late fee applies. For instance, a $50 fee might kick in after a payment is 30 days late, and continue accruing $50 every 30 days thereafter.
But, of course, that’s just one freelancer’s opinion — what do you think?
FAQs
Late fees can increase your outstanding account balance. For example, a late fee may be added to the next month's credit card statement. Not only does that raise the balance by the amount of the late fee, but you would then have to pay interest on the late fee as well.
What are the disadvantages of late payment fees? ›
Late fees can increase your outstanding account balance. For example, a late fee may be added to the next month's credit card statement. Not only does that raise the balance by the amount of the late fee, but you would then have to pay interest on the late fee as well.
What is the purpose of a late payment fee? ›
Late Payment Fees – An Overview
These fees serve multiple purposes: they compensate for the financial stress and administrative burden caused by late payments, encourage customers to pay on time, and allow businesses to manage their cash flow more effectively.
What is a good late fee charge? ›
How much can I charge for late fees? A standard late fee for invoices that are overdue is between 1% and 2% monthly. Flat rate fees should depend on how much you typically charge customers. You can charge late invoice payments either as an interest rate, a flat fee, or both.
How much late payment fee can I charge? ›
Late fees usually range from 1% to 2% monthly interest rate, so staying near that range is the most reasonable approach. Of course, some industries work very differently and may have higher monthly rates, so always be sure to research when deciding how you'll charge late payment fees.
What are some downsides of late payments? ›
If you continue to miss the due date, you can incur additional late fees. Your interest rates may rise. Paying your creditors late may result in an increase in your interest rate, often resetting your interest rate to a penalty (or default) APR.
What are the problems with late payments? ›
Late payments cause cash flow problems and drain business resources too, in the form of working hours spent chasing them, having to negotiate late payments with their own suppliers, potentially incurring costs through, say, overdraft facilities or credit cards, and having to go, cap in hand, to the bank.
Why are late payments bad? ›
Multiple late payments compound negative credit score impacts, as each one can cost you points. If late payments eventually turn into collections because your creditors have charged off those debts—or public records because they've sued you to collect what's owed—it can be even more damaging to your scores.
How to explain late fees to customers? ›
Send a late payment letter notifying the customer that their payment is overdue. In your late payment letter, explain when the due date was. List the overdue invoice charges and their new liability. Explain whether their late payment fee will increase if they do not pay within a certain number of days.
Why do late fees exist? ›
Late fees are charged when you fail to make the minimum payment on your credit card by the due date. But why do these fees exist? Simply put, they're there to incentivize timely payments and to compensate the lender for the risk of late or missed payments.
Many people don't realize that they can appeal a credit card late fee — especially if it's their first late payment. Many issuers will waive late fees as a courtesy to customers with good payment records. Call your issuer, explain the situation and ask a customer service representative if they can waive the fee.
Are late fees fair? ›
A late fee can serve as a deterrent, encouraging clients to adhere to payment deadlines. It's only fair to be compensated for the inconvenience and potential cash flow disruptions caused by late payments.
What are some tips to avoid late fees? ›
6 Ways to Avoid a Credit Card Late Fee
- Set up auto-pay at least for the minimum amount (or however much you can reasonably afford) each month. ...
- In case of emergency, ask for a pause in payments. ...
- Get alerts from your credit card company when payments are posted. ...
- Switch to a card with no late fees.
How Much Should You Charge as Late Payment Interest? The standard amount for late payment interest on invoices is between 1% and 2%, but you can charge more or less at your discretion.
Can small businesses charge interest late payments? ›
Because the government doesn't regulate a business' late payment fee, you can, in theory, charge whatever payment interest rate you see fit. However, small companies tend to charge a late transaction payment interest rate of 1.5%, while larger enterprises charge 2.5% and up.
How do you calculate late payment fees? ›
To calculate the interest due on a late payment, the amount of the debt should be multiplied by the number of days for which the payment is late, multiplied by daily late payment interest rate in operation on the date the payment became overdue.
What is the disadvantage of paying the bills late? ›
If you don't pay your bills on time, you could damage your credit. There are strategies to help you pay your bills promptly, including setting up automatic payments and consolidating your bills. Late fees on bills add up over time and can take a large chunk out of your income and savings.
What is the consequence of making a late payment on your bill? ›
The impact of a late payment depends on how late that payment is and the terms of your credit card. You may incur a late payment fee, penalty interest rate and risk damage to your credit score.
How do late fees affect credit score? ›
On-time payments are the biggest factor affecting your credit score, so missing a payment can sting. If you have otherwise spotless credit, a payment that's more than 30 days past due can knock as many as 100 points off your credit score. If your score is already low, it won't hurt it as much but can still do damage.
