Can I add late fees to invoices?

Q. At my wholesale business, one customer always pays invoices late. Would a “late payment fee” encourage customers to pay more promptly? Is $25 a good amount, and can I make this a recurring charge (for instance, $25 per month)?

A. Gary Nitzkin, a debt collection attorney in Southfield, (Nitzkin & Associates at www.creditor-law.com) says late fees are legal but may not be worth the effort to pursue.

In Michigan, in order to obtain a late fee, there must be some agreement between the parties before the transaction that provides for late fees.

The agreement can be as simple as a conspicuously placed sign in the store that advises of the late-fee policy or a letter to customers explaining it. If purchase-order forms are used, the form should state the late fee policy.

Your policy should clearly state both the amount and the time frame in which you expect payment (“A $25 late fee will be charged for payments not received within 30 days of purchase”).

When setting the amount, keep in mind that the law does not enforce penalties. View the late fee not as a penalty but rather a recovery of expenses incurred in collecting payment from the delinquent customer (such as a bookkeeping fee). $25 sounds high for a late fee and might be viewed as a penalty; for the same reason a recurring charge is not recommended.

As a practical matter, some delinquent customers are no more likely to pay on time when threatened with a late fee. Most people are unlikely to sue for such a small amount, but if you did choose to sue, the customer might find an attorney to counter-sue for usury, since the late fee is for the use of money over time (i.e. interest, which is subject to usury statutes).

In short, charging late fees may be a bigger headache than it is worth. The simplest approach may be to insist that the customer with the poor track record pay for the order at the time it is placed. If you accept credit cards, suggest that the customer pay by credit card—then the card’s issuing bank is the creditor instead of you.

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