Late payment fees. Unethical or justified? Discuss.
Recently I was accused of being ‘unethical’ for charging late payment fees and the company in question said it was their policy never to pay late payment fees.
I am very sensitive to being called unethical, dishonest or any other adjective that means I couldn’t hold my head up high and so have given this a lot of thought.
When I was new to business I took late payment very personally; that my clients were not happy with what I had done for them. I remember calling to ask whether they hadn’t paid the invoice because they were unhappy with what I was doing for them. Of course, this was not the issue, they had simply thought someone else had done it.
Money, charges and invoices were always a stumbling block for me in the early days and I remember my coach telling me ‘it’s just a number’, and I never believed her, because to new businesses numbers REALLY matter. But, the money/number is not the value of what you do it’s simply the mechanism that allows you to work, live and deliver your services, whatever you charge. Unfortunately, it’s the money/number that dictates how seriously your clients or the world takes you and it’s the fear of spending more money or wasting money that motivates people to take action. If you put on a free event more people will drop out at the last minute than if you’ve charged a nominal for a ticket.
With this delicate relationship in mind, I set up my payment terms and gave my clients 30-days but I invoice them in advance of the work, because I know I will have completed their work in 30 days and they will have had 30 notice; win - win. Against my accountant’s advice I pay most of my suppliers on shorter 7 day or immediate terms because they are small business or sole traders who ‘need’ paying. Despite this being terrible cashflow management on paper, it has always worked for me as long as my clients pay me within those 30 days. Here lies the problem, some didn’t.
It was initially both my business coach and accountant who both advised me to add a late payment fee for different reasons; for the business coach it’s a way of asserting a mutual respect in our client/service relationship and from my accountant’s point of view it was the increased costs of my bookkeeper-credit controller having to email and phone to chase money. I am not going to offer a discount for payment within a certain time – I don’t charge the margins for that.
At first, I added ‘the right to charge a late payment fee of £45’ to my invoice’s notes and emails and this was initially met with hostile responses even though it was just a notification it might happen. Once I realised that some businesses’ cash management is the opposite to mine – don’t pay anything until the very last possible minute and the millionth prompt – I added a late payment clause into all my contracts because frankly some people just take the piss and I wanted recourse. In my SLA it now states;
‘It is regrettable, but experience has taught us to enforce a strict overdue payment policy: You will be issued with a late payment fee of £90 if payment is over 14 days late and then an additional £90 every 14 days that payment is overdue. If payment has still not been received after 60 days, we will issue court papers without exception.
Please note: Not paying an invoice will not be taken as termination of our agreement this must be done in writing giving one month’s notice.
If you have any issues that you need to address on receipt of our invoice please email or call us within 3 working days of receiving it, otherwise this constitutes your full agreement to pay the invoice in full.’
It did take me a while to get my head around the fact it is just a number, it’s a mechanism and you just have to decide how you can use those numbers most effectively, so they help your business and not hinder it. If you need to agree 60 terms for clients like councils that are surrounded in red tape, so be it, but it’s agreed. I also recognise that I am still too emotionally involved in the number side of things and so the statement in my SLA read, agreed and signed by clients is clear instruction to my bookkeeper-credit controller on how she is to proceed, and the fees cover her time.
Actually, having a late payment fee gives me the opportunity to approach clients to ‘save’ them from the fee while at the same time reminding them they had an outstanding bill.
‘Hi Mr/Mrs Client, I just wanted to give you a call to remind you about your outstanding invoice. I want you to avoid the late payment fee which my credit controller will apply…’
The statistics on late payment fees I found in just one article from a Google search (www.crunch.co.uk/knowledge/cashflow/britains-small-business-late-payment) aren’t surprising.
‘Close Brothers Invoice Finance has just revealed figures that show 17% of small and medium-sized enterprises (SMEs) say late payments seriously affect their ability to trade, while 60% of firms complain that they spend at least a day every month chasing outstanding invoices’ (Nov 2016).
I do love the expression used in this article of ‘supply chain bullying’ as the company who called me unethical for threatening a late payment fee are a £12m turnover company compared to my £120k, they had 30-day terms and were a recurring client – my invoice was not unexpected.
The ironic thing is that I am really glad my suppliers don’t charge me late payment fees because I don’t always see their emails and do forget to make payments! Perhaps if they did charge me I would be more vigilant; it’s not until you get a parking ticket that you start setting the alarm on your phone after all.
So, unethical or justified? I say justified. You enter a business agreement to supply services and receive a number for doing so within a given time frame. Why should businesses of any size bear the costs of chasing remuneration? It is not a penalty for a slush fund, it’s covering additional costs which could have easily been avoided.