Chasing payments is one of the least glamorous aspects of running a web design agency. In fact, small businesses spend 15 days every year chasing down late invoice payments.
That’s why 17% of design agencies require some form of deposit or full payment before they begin work.
Unfortunately, resolving payment issues is a rite of passage for web design agencies. The good news is you can resolve them with a late fee policy and good upfront communication.
In this guide, we share exactly how to charge late fees and prevent missed payments.
What Is a Late Fee Policy?
A late fee policy is a set of guidelines that outlines the penalties a client will face should they not pay their invoices on time.
Think of it as a credit card company that charges interest when you don’t make monthly payments.
Make sure you always include a late fee policy, the amount that will be charged, and any grace period provided within the original client agreement.
You can choose to charge either:
- A percentage of the overdue balance
- A fixed amount.
What Is the Standard Late Fee Charge?
There isn’t one single standard flat fee. However, many web design agencies charge between 1 to 2% in monthly interest, so staying near this range would be the optimal approach.
Let’s say a client was late on a $1,000 project. The first late payment would be $20 (based on a 2% monthly rate), while the second would be $40, and so on. Basically, each month your payment is late, you pay an extra 2% of the original amount.
How to Prevent Not Getting Paid in the First Place?
Not getting paid can leave a sour taste in your mouth. Nobody likes to get taken for granted, or mistreated. It’s bad business and can lower your confidence.
If you want to prevent not getting paid in the first place, here’s what you can do.
Take Upfront Payments
The best way to eliminate not getting paid is to force clients to take all the risk by making full, upfront payments for the project.
In this case, the client pays you 100% of the negotiated fee before you begin any work.
Here are a few tips to help you get a full upfront payment.
It’s important to have a fixed scope that clients sign off on, so you and your clients know what to expect. If your clients are uncomfortable with paying the full amount before the start of the project, you can agree on a 50% deposit upfront, due when the contract is signed.
Typically your contract should state that you have the right to hold the work until the balance is paid.
Break the Project Fee Into Milestone Payments
Earning trust can be difficult, especially in the beginning stages of a client relationship. You can take this a step further by asking for milestone payments.
This is effective for longer projects such as an entire website rebuild that may take up to six months.
You can negotiate an initial deposit, and split-up remainder payments at certain pre-defined milestones.
Set Up Autopay or Have Their Card on File
We asked a few professionals with hands-on experience in the industry about how to prevent getting late payments, or not getting paid at all.
The majority of them suggested an autopay arrangement as the best solution.
It’s important you get a card on file upon signing the agreement. Then, agree on charging their card in line with deliverables or milestones. This is a fair way to ensure you’re paid.
And if the card declines, you can withhold delivering the project or website until payment is made.
Many payment providers, such as Stripe, have a Save Card feature that lets you store your client’s credit card information for future use.
Of course, to prevent any data leaks and keep your client’s credit card information safe, you must bear in mind the local laws regarding data compliance, and uphold Payment Card Industry Data Security Standard (PCI DSS) compliance.
This approach is certainly more convenient than waiting for the client to manually send payments on their end.
How to Charge Late Fees
82% of small businesses have cash flow problems. It’s a major reason why businesses fail.
You can fix this by simply charging a late fee, ensuring you always get paid on time. Here are essential tips on how to charge late fees in the best and most effective way possible.
#1: Do Your Research
While late fees may not seem like a big deal, they can have a highly positive effect on your business.
Agencies tend to get paid more promptly when a late fee policy is included in their contract. Also, it shows you’re a professional business that takes your work seriously.
However, you can’t charge late fees as you want…
There are laws in place that may place a ceiling on how much you can charge for your late fees.
Many states in the U.S. do not have any maximum late fees or grace periods. But it’s important to check since it varies by state.
Here are a few notable states to be aware of:
- D.C. – 5% per month and 5-day grace period
- Florida – Maximum 5% and 15-day grace period
- New York – $50 or 5% per month max late fee and 5-day grace period
- Oregon – Maximum 5% per month
- Tennessee – Maximum $30 or 10% per month and 5-day grace period
In the United Kingdom the law is that for business to business transactions you can charge statutory interest, which is 8% plus the Bank of England base rate. So if you were owed £1,000, and the Bank of England base rate was 0.5%, you would calculate the interest as £1,000 x (8% + 0.5%), which is £85. You would then need to divide this by 365 to calculate the daily rate of statutory interest.
#2: Add Your Late Policy to Your Invoice Payment Terms
Including a late fee policy in your invoice payment terms is imperative. Without it, you can’t legally charge any late fees. This gives you the legal authority to pursue invoice payments and add on a fee.
The best way to word it is to keep it simple and easy to read, eliminating any confusion.
Here’s how you can phrase it:
If a customer is late paying an invoice, you can then follow up with a late fee letter. This letter needs to be polite, accurate, and helpful. It should also be based precisely on the terms included with the original invoice.
Make sure to consult your attorney so your client’s contracts comply with local and country regulations. This protects you in the case of disputes that may occur down the line.
#3: Notify Clients Ahead of Time
For existing clients, you need to keep them in the loop about any changes you’ve made to the terms. Never blindside your client with a fee that wasn’t previously mentioned.
Instead, let them know about the change so they aren’t caught off guard.
Discuss the late fee policy with all clients before the contract is signed to ensure they understand the ramifications of late payments.
#4: Send Invoices Promptly
It’s always good to send your invoices promptly, along with the final work. Sending it when the project is fresh in their mind increases the likelihood your client processes the payment right away – but never leave this to chance.
Invoicing should be automated using cloud-based accounting software.
Also, sending the invoice promptly gives your clients enough time to pay. When sending your invoices, make sure you make it crystal clear what clients are paying for, such as:
- Hours spent (if necessary)
- Distinct project numbers for deliverables such as (X web pages, etc.)
- Cost of materials
- Consultation time
#5: Follow Up Immediately on Late Payments
Many invoicing software tools can send out reminders for the due date.
However, sometimes those get quickly ignored. In that case, you can write a personalized and polite email reminder mentioning that perhaps your invoice has gotten lost in the shuffle.
That should be enough to jog their memory; however, you should also include the invoice number along with the project details.
Here’s a template you can use for payment reminders:
#6: Send a Revised Invoice
When your client fails to pay on time, it’s best to send them a revised invoice. After each month, you can create an updated invoice that includes all the late fees added to the total.
You can include a note that reminds customers that the payment is overdue.
Subject line: [Company Name – Invoice Number] Regarding Your Overdue Payment
I am sending you this email because I noticed an overdue payment issue.
According to my records, the payment for invoice No. [Invoice Number] is X days overdue. The payment was due on [Date]. Could you please let me know when to expect proof of payment for this?
…and warn them that another late fee will be added if they don’t pay within the given time frame.
#7: If Necessary, Escalate the Issue
54% of workers of freelancers complain that it takes too long to get paid.
If the issue prolongs and there doesn’t seem to be any traction on the client’s end to resolve this payment issue, it may be time to seek legal help.
If this is the case, then you can send a letter of demand, which serves as official documentation requesting payment.
Dear [Mr/Ms Surname of Debtor],
We regret to note that despite previous letters the above balance is still outstanding. Unless you contact us within 48 to agree payment:
- We will commence our legal Debt Collection Procedure against you and place the matter in the hands of our solicitors to issue legal proceedings against you for the full amount overdue, including interest and legal costs.
- In the event that judgment is entered against you in those proceedings, we will register the judgment and publish it in all relevant trade journals.
Yours faithfully,Tired Agency Owner
For some clients, this is serious enough to motivate them to make a payment. However, there are a few options to pursue further action if they ignore even this letter:
- Hire a lawyer. The lawyer can file a lawsuit on your behalf to recover the payment, legal fees, and other damages incurred by the agency.
- Hand over the case to a collection agency. Collection agencies will help get your money back and take a small portion of the invoices they successfully recover.
- A small claims court. This is a venue designed to help businesses resolve any disputes over small amounts of money, however, this can only be done for local clients.
Conclusion – Consider Using a Late Fee Policy to Your Advantage
Having an unstable revenue stream due to unpaid invoices can have a detrimental impact on your business – in some extreme cases, it may lead to bankruptcy. That’s why it’s essential to protect yourself and make sure your customers and clients pay you on time.
One way to achieve this is to leverage a late fee policy and add it to your invoices.
It will encourage your clients to pay you on time, since they will be charged extra for a missed or delayed invoice payment.
Another thing that can help is to use a project management tool like Atarim.
Atarim is the leading visual collaboration platform trusted by 13,000+ agencies (web dev, design, and beyond) worldwide supporting project delivery for 1,200,000+ clients. We help you redefine how you work with your clients and team to eliminate client delays and enjoy delivering projects in weeks instead of months.
Agencies, developers, and project managers use Atarim to stop relying on guesswork and collaborate with clients directly, so they can see what’s going on all the time. This helps your clients to see all the hard work your team is putting into their project – encouraging them to pay you for your efforts.
Try Atarim for free, keep your team and clients on the same page, and prevent late or unpaid invoices.