Should You Charge Late Payment Fees on Overdue Invoices?

April 12, 2024
4
minutes to read
by
Jelina Rosin
Table of Contents

Ever feel like chasing invoice payments is your full-time job? Many business owners know the struggle of waiting for payments that seem to be stuck on "pending." You deliver fantastic work, but those payments you're counting on just aren't coming in. This can seriously mess with your cash flow!

This begs the question: how do you encourage on-time payments and recoup some of the costs associated with chasing down overdue invoices? One answer is by implementing late payment fees.

Now that we've established late fees as a potential solution, let's delve into the benefits and legalities of implementing them.

Automatically send late payment reminders from Thriday
Automatically send late payment reminders from Thriday

Late Payment Fees: Is it Legal in Australia?

The answer is yes, you can legally charge late payment fees on overdue invoices. However, there are some important things to keep in mind:

1. Is the late fee amount considered fair, reasonable, and within legal boundaries?

The key word here is "reasonable." The late fee amount you charge should be a genuine attempt to cover the extra costs incurred due to late payment, not an excessive penalty. Think about the administrative costs of chasing payments, the impact of inflation on the value of the money you're owed, and any potential lost investment opportunities.

Also, The fee amount must be considered "reasonable" according to your state or territory's regulations. For instance, in Victoria, the local government suggests a reasonable late fee should not exceed the cost of recovering the late payment, such as administration expenses. There's no set percentage or flat fee limit.

For updated late payment fee guidelines in Victoria, please visit: https://djsir.vic.gov.au/__data/assets/word_doc/0004/1955731/Victorian-Government-Fair-Payments-Policy.docx 

2. Is the late fee transparent?

Be upfront with your clients about your late fee policy. Clearly outline the fees in your contracts and invoices, including the amount of the fee and when it starts accruing (e.g., after 30 days past the due date). This transparency helps avoid misunderstandings and ensures your clients are aware of the consequences of late payments.

You can only charge a late fee if it's clearly outlined in the original contract or service agreement with your client. This is where your Terms and Conditions (T&Cs) come in.  

Think of your T&Cs as the rulebook for your client relationships. They should clearly explain:

  • Your Services: What you offer and how you deliver it.
  • Payment Details: How and when clients should pay you.

A typical payment clause in your T&Cs should cover:

  • Payment Methods: Accepted payment options (e.g., bank transfer, credit card).
  • Payment Processing: How you receive payments (e.g., your bank details).
  • Late Payments: The consequences of overdue invoices, including any late fees.
  • Pricing and Additional Charges: The agreed-upon price for your services and any additional fees (e.g., delivery).
  • Currency: The currency you accept for payment (e.g., AUD).

When implementing late payment fees, alway include this information in the payment clause of your T&Cs. The clause should detail:

  • Grace Period: How long does the client have to pay after the invoice is issued?
  • Late Fee Details: This could be a flat fee or an interest rate applied to the outstanding balance.

Fortunately, Thriday features an intuitive platform that allows you to easily create professional invoices with clear late fee information embedded directly in the document.  This eliminates confusion and ensures your clients see the late fee details upfront, before they agree to the service.

To discover more about these features, read how Thriday does invoicing differently.

Smart features to help you get paid faster and save you time managing your financial admin
Smart features to help you get paid faster and save you time managing your financial admin

3. Does the late fee structure comply with limitations set by ASIC? 

While late fees are legal, there are limitations on the amount you can charge. These limitations can vary depending on the specific circumstances, so it's important to check the guidelines set by the Australian Securities and Investments Commission (ASIC). Their website offers resources and information on late payment fees specifically: https://asic.gov.au/

Beyond Late Fees: Alternatives to Consider

While late fees can be a deterrent, it's also important to maintain good customer relationships. Here are a few alternative approaches to consider:

Payment Plans

For customers facing temporary financial hardship, offering a payment plan can be a solution. This allows them to break down the outstanding balance into smaller, more manageable payments.

Extended Payment Terms

For first-time offenders, you might consider extending the payment deadline by a set amount of time (e.g., an additional 15 days) to give them a chance to catch up.

Early Payment Discounts

Offering a small discount (1-2%) for payments received before the due date can incentivize promptness and improve your cash flow.

Thriday makes it super simple to offer early payment incentives or charge late payment fees on invoices.

Key Takeaway

Late payment fees can be a valuable tool, but they're not a one-size-fits-all solution.  Consider your specific business needs and client relationships.  Weigh the pros and cons of late fees carefully. Explore alternative strategies like early payment discounts and automated payment systems. 

Ultimately, the goal is to establish a system that encourages timely payments while maintaining positive client relationships and a healthy cash flow for your business.

References:

https://djsir.vic.gov.au/__data/assets/word_doc/0004/1955731/Victorian-Government-Fair-Payments-Policy.docx

https://www.vsbc.vic.gov.au/news-publication/getting-paid-on-time/ 

https://asic.gov.au/

DISCLAIMER: Team Thrive Pty Ltd ABN 15 637 676 496 (Thriday) is an authorised representative (No.1297601) of Regional Australia Bank ABN 21 087 650 360 AFSL 241167 (Regional Australia Bank). Regional Australia Bank is the issuer of the transaction account and debit card available through Thriday. Any information provided by Thriday is general in nature and does not take into account your personal situation. You should consider whether Thriday is appropriate for you. Team Thrive No 2 Pty Ltd ABN 26 677 263 606 (Thriday Accounting) is a Registered Tax Agent (No.26262416).

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