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Should You Charge Customers Late Fees?

When it comes to getting customers to pay on time, business owners typically use two approaches -- carrots and sticks. Pay your bill early and you get a nice discount. Pay your bill late and you get smacked with a late fee.

The trouble is that neither of these solutions does the job it's intended to do. Quick payers who'd pay on time anyway often take advantage of early-payer discounts, cutting into your company's profit margin. Slow payers -- often cash-strapped consumers or small business owners themselves -- don't have the money to pay late fees and may not pay you at all.

What's the answer? Scrap this ineffective system of rewards and punishments and try to figure out why your customers are paying late and what you can do to make them pay you faster.

For example,

1. The customer who pays late because he's angry. Not every customer pays late because he doesn't have the money. Some customers act out their frustration with your company by being passive-aggressive. While your customer may not want to confront you about shoddy workmanship or poor service, he'll accidentally "lose" your invoice or "forget" to send in his check. The solution: Invite your customer out to lunch and ask him what he likes and doesn't like about your company's product or service. Once you fix whatever is making your customer unhappy, you may be pleasantly surprised by how quickly your cash flow improves,

2. The customer who pays late because he doesn't think your invoice is a priority. Consumers typically pay their mortgage first, their light bill second and their credit cards (at least the minimum balance) third. That's why, if your company provides a service like landscaping, dog walking or interior decorating, your invoice may fall to the bottom of the pile. The same goes for dealing with large corporations who see you as a small vendor who will wait 90 days or more to get paid because they know that your small business needs their dollars desperately. The solution: Let your customers -- big and small -- know that you're prepared to cut off service if they don't pay within a reasonable period of time. If your customers continue to pay late, you need to call their bluff -- and find new customers who respect you and your business.    

3. The customer who pays late because he doesn't have the money.
While nobody likes to lose a customer, you need to be disciplined about cutting off customers who can longer afford to pay their bills. It's one thing to let a customer stretch out his payments during a seasonal cash crunch, it's another to continue to perform services or extend credit to a customer who has lost his job or whose business is going down the drain. Be friendly, be polite but be firm about explaining to a customer like this that your company cannot afford to work for free.

Having run my own small businesses for more than 20 years, I've never been a fan of charging customers late fees or hitting them with punitive interest. I'd much rather sit down with them and figure out what the problem is and what we can do to resolve it amicably. If we can't -- or the customer can no longer afford my company's services, we shake hands and call it a day

Rosalind Resnick is a New York-based freelance writer, entrepreneur, investor and author of The Vest Pocket Consultant's Secrets of Small Business Success.

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