Late payment fees may seem like an attractive way to ensure that your clients pay their invoices on time; however, it is important to understand the restrictions around late payments and how much you can actually charge for late payment fees. This article discusses the options you have to implement late payment fees in your business model.
Terms and Conditions
Your business terms and conditions set out the relationship between yourself and your customers. It should clearly document the goods and services you are offering and how you will provide the service. Terms and Conditions should always include a payment clause that sets out how and when your clients should make payment to you. Typical payment clauses will set out:
- how your customers can make payment;
- how you receive payments;
- when you do not accept or allow payments;
- that your customer agrees to pay the price that you advertised plus any additional charges, such as delivery; and
- the currency.
If you would like to include a late payment fee, then you should include this information in the payment clause of your terms and conditions. The conditions should outline how long the client has to pay the invoice once it has been issued and then the cost of the late fee or interest accrued due to failure to pay.
If you have not included details of the late fee in the contract, then you cannot choose to add this on at a later date.
Are Late Payment Fees Reasonable?
Although late payment fees are legal in Australia, the amount you charge your clients must be reasonable to cover the loss your business has incurred by not being paid on time. If the late payment fee is unreasonable or excessive, then the client may refuse to pay. Including an exorbitant late payment fee in your contract is known as a ' penalty clause'. This is unenforceable in an Australian court.
To ensure that the penalty rate is enforceable, you must be able to prove that it was a genuine pre-estimate of loss and not just a punishment. Examples of loss due to late payments may include:
- additional time taken to chase up the payment; or
- the cost of paying outside help such as lawyers or debt recovery agents.
A business running a monthly food delivery subscription bills their clients after they have made the delivery. If a customer does not pay by the date stated on the invoice, then they will incur a $5 per week penalty fee. This fee is to cover the cost of the additional administration required to follow up on the late payment. This example is likely to be determined as fair and reasonable.
A separate food delivery business works under the same model as example one, except they charge $50 for every day that the payment is overdue. This example is likely to be determined to be a punishment and, therefore, would not be enforceable in court.
Should I Charge Late Payment Fees?
Late payment fees can ensure that you get paid on time and that any additional costs incurred due to the late payment are covered. On the other hand, charging late payment fees may be off-putting to your customers.
It is best to approach late payment fees on a case by case basis. Just because you have set out in the contract that late fees may occur, pursuing this without consideration may cause you to lose clients. Before handing out a fee, you may wish to:
- ensure you have provided the invoice with reasonable time for the client to pay;
- regularly remind the client that the payment is due before the due date;
- send the client a letter the first day they are overdue on payment as a reminder; and
- keep an open mind to flexible payment options with your customers.
What if the Client Continues Not to Pay?
If the client continues to ignore your reminders for payment, then you may be able to proceed with legal action. This usually occurs in two stages.
1. Send a Letter of Demand
The letter of demand will be a more formal notice than your previous reminders. Letters of demand set out the:
- the claim you are making against the customer;
- the timeframe the customer has to respond and make payment; and
- the consequences of not making payment.
2. Go to Court
If all other responses fail, you may wish to start court proceedings. Going to court can be a costly and timely process, so it is best to avoid this route wherever possible. Further, due to the costs of legal fees, it is usually only worth pursuing high-value cases.
Although late fees are legal in Australia, you still need to ensure you are considering the legal and commercial implications of charging these fees. Late payment fees must be reasonable and be agreed upon in your terms and conditions. The purpose of charging late fees is for them to act as an incentive to pay on time; they should not act as a punishment for your customers.