Operator Note: Should You Charge a Late Fee?
A meditation on dealing with Accounts Payable
(In B2BS’s inaugural Operator Note, I examine a basic issue independents face – getting paid – and the place of late fees.)
I get asked a lot about late fees. And when I give a straight answer (“If you’re asking, then probably”), people tend to misunderstand. So here’s the roundabout explanation – colored by my experiences.
Very early in my content career, I was one of several contractors who were paid to write reasonably well-thought-out comments on tech articles. (Yes, Virginia, engagement is bought and paid for.) It was a small gig, but it was good money if you broke it down on an hourly basis considering the light lift and steady work.
Sometimes payment would come on time, sometimes it would come a little late – but it was steady enough.
Then, one month, I wasn’t paid. None of us were. Oh, well. I figured they were just running a bit behind this month. The payment would come eventually.
Then we weren’t paid the next month either.
Then, despite speaking up, we weren’t paid the month after that.
But fret not. The client had a good reason. It was, I would come to learn, one of the most popular reasons a late-paying client gives:
We’re updating our accounting system.
Oh. Okay. That explains it. Take all the time you need, sweet angel. In fact, can I donate to the effort? Send me the link to the Kickstarter.
It took a few more months still for the client to finally pay us.
This wouldn’t be the first time I heard the “accounting system” excuse in my career – along with the almost equally popular “so-and-so is on vacation.”
Neither of these are legitimate reasons to not get paid. I’ve never signed a “systems-update clause” or “vacation clause” making full, timely payment unnecessary in either of those circumstances. I’m betting neither have you. Still, on occasion, a client pulls this crap.
Or makes some other excuse.
Or says that “payment is on its way” when it’s not.
Or says “I’ll look into it” when you bring up the unpaid invoice, and then ghosts you.
Or ghosts you without saying “I’ll look into it.”
Any of this sound familiar?
Sometimes, it’s the authorized contact’s fault, but that’s rare in my experience. There are exceptions (I’ve run into them), but the vast majority of client contacts at mid- and large-sized businesses want to get their contractors paid in full and on time. (Small businesses and lean startups are a coin toss.) Maybe you once in a while run into an authorized contact who unmaliciously forgot to forward an invoice the first time, but even then it’s generally not systemic.
Even more rarely, it could be the authorized contact’s boss(es) holding things up. In those cases, you’re typically dealing with toxic politics and/or toxic business practices. This is systemic – but, again, rare (and, sometimes, detectable before taking on a client if your red-flag radar is calibrated well).
I’ve spent approximately 20 years in various capacities of self-employment, and I’ve compared a lot of notes over the years with both B2B contractors and the corporate salary-serfs who hire B2B contractors. Here’s what we all seem to have agreed on:
Assuming the contractor hasn’t done anything seriously and materially wrong, Accounts Payable (or, at a small company, its analog) is usually the holdup.
More specifically, the reason a contractor hasn’t been paid is usually because the accountant or admin responsible for pressing the buttons either hasn’t felt like it or has decided that doing something other than paying the contractor is more important.
Even if the authorized contacts and/or their bosses are advocating for prompt payment.
Late Fees as Strategy
I want to be clear about something: In my career, I have usually been paid in full and on time, without issue. On the occasions I haven’t been, payment has been just a few days late. It’s rare that I’ve had to truly chase a client.
All this is to say that, most of the time, Accounts Payable people do right (or right-ish) by me. And plenty of other contractors.
But when an Accounts Payable staffer does wrong by a contractor? The intransigence and apathy are thick enough to cut with a knife.
To understand how Accounts Payable typically sits in the corporate hierarchy, consider this story a relative once told me. Long before the World Wide Web existed, an office branch at a former employer of his burnt down. The directive came down from above that the last function to be reconstructed would be Accounts Payable. The thinking: If you owe someone else money, you can expect to hear about it – and if you don’t, that’s a win.
Meanwhile, Accounts Receivable was reconstructed first – because revenue is mission-critical, and no one is going to remind you that they owe you money.
It’s hard to argue with that logic, but the downstream result of it is that, in too many cases, Accounts Payable becomes a world of “We only do check runs on the 15th because that’s when we decided we do check runs, and we forgot to do it this month, but maybe we’ll do it next month, but also we don’t care because you’re not us.”
(Yes, I’m being reductive and bitchy. I’m at peace with that. You would be too if you or a loved one ever had to wait too long for an agreed-upon payment.)
Given all this, I learned that my ability to get paid often depended not only on my relationship with my client contact, but also on the combined pull my client contact and I had with Accounts Payable.
That spelled tenuousness at best.
So I started including a late-fee clause in the contracts I would send out. Nothing huge. Usually something amounting to 2% or so.
(Note: Unless a lawyer is writing your contract, keep your late fees flat; do not charge ongoing interest. If your contract allows for charging interest, that can implicate a lot of laws that you may run afoul of if you don’t know exactly what you’re doing.)
You’d be forgiven for thinking that this was ineffective. After all, if it’s not important to a company to pay, say, $5,000 on time, what’s $100 going to do?
You’d be forgiven, but you’d also be wrong.
Charging a late fee is like hitting Accounts Payable with an Uno Reverse Card – repurposing the rigidity that keeps contractors from getting paid on time and weaponizing it against AP.
Consider: Whenever a contract has been signed, a purchase has been approved, or an invoice comes in at a mid-size or large company, Accounting is made aware. The not-yet-spent monies are applied against budgets. Purchase orders may be created. A mini-universe of bureaucracy explodes into being – tied to that dollar amount.
And not one penny more.
So when a second invoice comes in tacking on even a token amount of money to the total due, that throws accounting teams off. And they don’t like it.
They are also self-aware enough to realize that they can’t complain. The contract includes a late-fee clause, and it’s usually entirely their fault it was triggered. They can’t even effectively advocate for pushback because the additional amount is so small.
(Late fees also tend to extra incentivize the authorized client contact and their bosses – who are likely to be beside themselves over the idea that extra money is coming out of their budget – to crawl even deeper up AP’s you-know-what.)
I have never once failed to get paid promptly after a single late-fee re-invoice. Sometimes, hitting a slow-pay client with a late fee has gotten them to initiate payment within 24 hours. In the end, I’m either collecting in full and on time, or I effectively get better than bank interest for under net-60.
The main takeaways here are twofold:
1) No one will ever care about you getting paid as much as you do.
2) Late fees, used judiciously, get people to care more about you getting paid.
The Real Answer on Charging Late Fees
But the answer to “Should I charge a late fee?” goes deeper than that.
I once had a client for a project billed in three installments – an initial deposit, a mid-way payment after the primary deliverable was submitted, and a final payment after completion of the work.
The initial deposit came in no muss, no fuss.
The second payment came in smoothly and on time.
But after I had completed the project and sent my final invoice, payment was mysteriously absent.
Usual rigamarole. I sent reminders, got some “it’s on the way” and “I’ll look into it”-type responses, nothing happened, I sent more reminders, and got ghosted.
So, as a matter of course, my company hit them with an updated invoice that included the late fee. They paid my company a few days later.
But only the original invoice was paid – without the late fee.
I didn’t chase the client for it, however (though I theoretically still could because it wasn’t that long ago). Because the point of the exercise wasn’t to nail them for gas money. It was to get paid.
A late fee is like a gun. The point of a gun, if you’re neither wicked nor insane, is to not have to fire it.
Should you have a late-fee clause? If you can, then yes, absolutely (though a few states and municipalities already have built-in freelancer protections in the case of late payments, so make sure your contract doesn’t undercut your statutory rights).
But should you charge a late fee?
That’s a judgment call – and probably case-specific.
I’ve had otherwise good clients who were literally just a few days late paying once, and I let it go, as a matter of business judgment. My late-fee clauses don’t exist as a primary revenue generator; they exist to give a kick in the pants to those who would otherwise screw around – because without them, in those cases, I wouldn’t get paid at all.
Maybe I’ve left money on the table unnecessarily. There is something to be said for a “them’s the rules” approach across the board because it can train clients on how doing business with you works. (After all, you’re not in the business of lending out money interest-free.)
But there is also something to be said for occasional magnanimity in the face of minor, good-faith errors.
I leave it to you.
(Disclaimer: I am an internet bozo. This article/letter is provided for informational, educational, and/or entertainment purposes only. Neither this nor other B2BS content constitute legal advice or the creation, implication, or confirmation of an attorney-client relationship. For actual legal advice, personally consult with an attorney authorized to practice in your jurisdiction.)