I think it’s fair to suggest that some business owners are feeling a little stressed lately. Particularly when it comes to ensuring they are getting paid for their work. Sound familiar?
I discuss how my clients get paid in every custom-drafting call. If you’re in business, you want to get paid! As part of this conversation, we also discuss what happens if they don’t get paid on time. Or if they have a difficult client who may withhold payment.
Small business owners often assume they can ‘create’ a late payment fee and enforce it on their customers should their payment be delayed. With almost everything in business, it’s not that straightforward.
The Importance of Business Terms and Conditions
People who start small businesses are typically not the people who are brilliant at writing their business terms and conditions. Unless you’re a small business lawyer, like me, you shouldn’t need to be either.
However, despite it not being part of your skillset, you still need to have effective terms and conditions that genuinely set out the relationship between you and your clients. Terms and conditions protect business relationships.
Business Terms and Conditions should always include details regarding payment, and self-drafted terms typically advise how much to pay and how (i.e. credit card). They generally forget to address what happens when a refund is required, if a payment is not paid or is paid late.
A professionally drafted terms and conditions agreement should also include aspects relating to payments, such as:
- Delivery fees or other additional charges
- In what cases you would not accept/allow payments
- Relevant currency
- The application of GST
- Late payment fee details, if applicable.
Are Late Payment Fees Legal in Australia?
Late payment fees are legal in Australia. If the terms and conditions don’t initially include this fee, you can’t add them on later, should a client become difficult or regularly pay late.
Late payment fees are only legal where they cover the reasonable costs (loss) of the business not being paid on time. A sizeable late payment fee (also known as a penalty fee) which is much more than any reasonable cost, is unenforceable.
Although late payment fees are legal, when reasonably applied to your written terms and conditions, they don’t always fix the problem of getting paid on time.
How to Manage Late Paying Clients
Late payment fees are not the only way to help ensure you get paid on time. When speaking with custom-drafting clients, the problem of late payment is typically a result of an internal process or external communication issues.
If you have a late payment fee in your terms and conditions, use it with caution. Instead, consider:
- Communicating with your clients about expected payment terms. Some business owners pay every invoice at the end of the month, regardless of what the invoice says. It is an opportunity to converse with clients about what’s required to work with your business.
- Provide invoices a reasonable time in advance.
- Send reminders for payment BEFORE the due date.
- Create a communication process to advise clients when their invoice has gone over the due date.
- Create a pay early incentive program.
- Implement flexible payment options. I.e. provide payment via credit card, buy now-pay later options, or split larger invoices into smaller, regular payments.
When your business regularly manages late payment issues, this is a clear indicator of action that needs to be taken to improve communication and expectations.
Remember, although late payment fees are permitted in your business terms and conditions, they are not the only solution for effectively managing this issue. Your agreements need to spell out details for payment. If they don’t, or you are concerned the contract might be leaving some significant gaps, I invite you to book a 10-minute complimentary chat with me.