When to charge late payment fees without losing the customer

Late payment fees divide small business owners. Some think they are the only thing that gets slow payers moving. Others will not charge one because they are afraid of the argument. Both views have something to them.

This is general information, not legal advice. The rules depend on where you and your customer are, so check your own contract and local law.

You can only charge what you agreed to

In most places, a late fee needs a basis. Usually that is a clause in your contract or terms that the customer accepted before the work started. A fee you add after the invoice is late, with no earlier mention, is the kind that gets disputed and rarely collected.

So the first step is not an invoice line. It is a sentence in your terms of business, in plain words, such as the amount, when it starts, and whether it repeats.

The UK has statutory rights

If you are a business selling to another business in the UK, the Late Payment of Commercial Debts (Interest) Act gives you a right to statutory interest and a fixed sum for each late invoice, even if your contract is silent. The interest is set at a rate above the Bank of England base rate, and the fixed sums depend on the size of the debt. We are not going to quote current figures here because they change, so look them up on the government website before you rely on them.

Outside the UK, other countries have their own rules, and in the United States it mostly comes down to your contract and state law.

How to charge a fee without losing the customer

• **Say it early.** Put the fee in your terms and on your invoices, so it is never a surprise.
• **Give a short grace period.** A fee on day one feels like a trap. A fee after two weeks feels fair.
• **Send a reminder first.** Many customers pay after the reminder and the fee never comes up.
• **Be willing to waive it.** A long standing customer who is a week late once should hear from you, not receive a penalty. Waiving a fee in return for payment today is a fair trade, and it works.
• **Keep it proportionate.** A fee that is large compared with the invoice looks like a punishment and invites a dispute.
• **Put it on its own line.** Do not bury a fee inside the invoice total. A separate line on the statement keeps the original invoice clean.

What not to do

Do not add a fee to an invoice you know is in dispute. Do not charge a fee to a customer who has told you they will pay on a particular date, until that date has passed. And do not apply fees by hand to some customers and forget others, because inconsistency is the first thing a customer will point to.

Disclosure

This article is from Mugavi, which makes accounts receivable software. Mugavi has a late fee rule you set yourself, with a grace period and an optional cap. It never applies a fee on its own: it lists the invoices that are due one, and you choose which to apply. It skips disputed invoices and invoices with a promise to pay. It does not write the fee back to your accounting software and does not add it to the payment page, so you collect it yourself and mark it paid. Everything above works without it.

For the step by step version with wording for the invoice and the reminder, and the current UK statutory figures, see how to charge late fees on invoices in the US and UK.

Fees are easier to stand behind when the invoice states its terms clearly. If you invoice in the UK, see UK invoice payment terms that make a late invoice easier to chase for what belongs on the invoice.

Related reading: tracking a customer's promise to pay, the true cost of late payments for small businesses, when a UK invoice is really late, by payment method.