One of Ubersmith’s long time feature requests has been late fees, and as you could have expected, the requests have gone up significantly since the economy took a coffee break. As we currently work on Late Fee support for Ubersmith DE 1.8.2 (to be released in December), I got to thinking.
Once upon a time, I worked at a company that had a vendor. This vendor serviced us for nearly 7 years, and with a healthy dose of “vendor financing” and very flexible payment terms, we never came up short on a single cent. I had a close relationship with their collections department, and for a long time, paying Net 60+ was normal.
Then one day, without warning, they started charging us the late fees they had always been allowed to contractually charge us. It hurt. It didn't just hurt the budget though, it also hurt the relationship. When we slipped behind on payments, it was because things had gotten tight and there just wasn't enough money to go around.
Since we had done business together for so long, we were upfront about it, saw the vendor as a long-term partner, and proposed a slow way to get the account back into terms. Not being fast enough, the vendor decided that we needed some additional incentive.
So what did we do?
We paid the late fees, cursed our vendor, adjusted our budget to include the new expense and weathered the storm. After several months, we got the account back into terms, reduced our spend and switched our business to a new company as quickly as we could.
Wait, but weren't we in the wrong for paying late? Yes, absolutely. We survived on the good will of this vendor for a long time, and definitely took advantage of their kindness for far too long. When push came to shove, the late fees helped us bring the account back into place, but to this day, I think they took the wrong approach.
OK smart guy, what do we do?
When we release Late Fee support in Ubersmith DE 1.8.2, your first inclination will be to get it set up for every client, and start getting some cash for all those slow paying customers. I assure you, this will infuriate your customers, just like it infuriated me. Instead, consider a slightly different approach.
For all new customers, enforce late fees from Day One. For these companies, Ubersmith doesn't just save time by automating invoicing, but it also plays automatic bad cop. The first time they slide on a payment, they will automatically receive the configured late fee on their next invoice, and probably give you a ring to ask/explain.
For your existing base, use a combination of communication and common sense. Start with an email to your existing customers warning of an upcoming change, speak to your biggest offenders on a one-on-one basis, and use discretion. Since Ubersmith will let you set the lates fee on a per customer basis, you have flexibility.
Since you’re such a nice person, and this is the first time they missed a payment, you happily offer to credit out the late fee. The customer feels good, and you feel good - you’ve both strengthened the relationship, and set the tone for the future.
So why even have them?
On top of the obvious incentive of paying their bills on time
For the perpetual slow payer, it can offset the hidden cost of delayed receivables. You have your bills to pay, and maybe you needed to take out a bank loan to manage cash flow. Maybe you’re flush with cash, and you could be making a small percentage by investing the money.
When tracked by your collections team, they can also be a good indicator of what customers are starting to have financial difficulties. This information may help better predict your receivables, and bubble up which customers should be chatting with more often.
Finally, when you’re dealing with the worst case scenario - a deadbeat customer, the late fee can offset some of the margin you’ll lose if they stiff you for their last month or two of service.
All that said, the trick here is to be consistent with your customer and encourage communication. We all feel most comfortable when we know the rules of the game, and don't like being surprisingly punished for previously acceptable behavior. Dont let the taste of the extra money taint your overall vision - a business relying on late fee revenue is doing something wrong.
Ubersmith will make it easy to add late fees to their account, but will also make it easy to take it away. Sometimes, it’s just good business.