Dec/Jan 2008 – Charging Late Fees

Charging Late Fees

Business owners anxious to find ways to motivate their customers to pay on time are turning to a technique primarily associated with consumer lending – charging late fees or interest penalties. The practice, once shunned as unseemly in the business arena, is gaining converts, but what are the benefits and does it work?

The obvious advantage to charging a late fee is that it forces the customer to modify their behavior and begin paying on time.

If behavior modification does not occur and you collect on your late fee the income generated will go to offsetting your overall company collection costs.

Including a late payment fee / interest policy on your signed customer credit application allow such charges to be enforced as contractual should legal action be required in order to collect.

A recent survey by the Credit Research Foundation (CRF) found that less than one-third (27.2%) of companies actually assess late fees, while 86% of those surveyed say that their sales agreements or credit applications include a stipulation that their organization has the right to assess late fees on past-due accounts.

This same CRF survey found that just over half (52%) of those companies that have late fee policies in place and visible on their customer correspondence believe that the threat of late payment charges help them get paid more promptly. Just over half the respondents indicated they collected roughly half of what they charged while 20% indicated they collected more than 75% of their late fees.

From 18th century British Statesman and Diplomat Lord Chesterfield: "Promptness is the soul of business."

…Some food for thought. Punctuality pays.