How to Effectively Charge Late Fees

Every once in a while we have a customer call who is unsure about whether or not to charge late fees and the best way to set them up. In Probill, you have three options when it comes to charging late fees.

Fixed Late Fees: By choosing this option you are electing to tell Probill to charge a certain amount after a customer goes beyond a certain amount of time past the due date. So for example, you can tell Probill to add a $5 late charge after account is 30 days past due. This is a straightforward and simple way of charging customers late fees.

Annual Percentage Rate (APR): Charging customer via an APR is a bit more complicated. Investopedia explains APR this way:

"The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction."

Basically you are charging interest on the payment that is owed to you. The thing that you have to keep in mind about APR is that it is the "annual" percentage rate. That is why when you put an APR into Probill it automatically divides the number by 12 (12 months per year) and gives you the monthly rate. The other thing you have to keep in mind about APR is that there are limitations to how much you can charge. This limit varies from state to state and between industries. In Probill you can not set an APR of more than 50%. Just for an example, the majority of credit card companies (known for their high rates) don't charge more than 30% APR.

Now there are some problems when charging you customers these fees. Let's take two examples:

  1. A customer that owes you $25.00 on their normal recurring bill
  2. A customer that owes $6,000 on an install that you did last month.

In the first scenario a $5 fixed late fee on the $25 charge is a great incentive for your customer to pay you now as well as on time in the future. However charge them a late fee at 18% APR, or 1.5% per month, and that's only about 38 cents - not much of an incentive.

Now take the second case, to someone who owes $6,000 an extra $5 isn't going to make much of an impact. However, charge them at the 18% APR and they've racked up a late fee of $90.

For this reason, Probill has a third option to charge late fees.

Greater of Fixed or APR: If you elect to choose this option it mitigates the problems of the other two by combining them. Basically when adding late charges, Probill looks at the amount a customer owes you and calculates the late charge based on APR. If this amount is less than your preset, fixed amount (say $5), then Probill just charges the $5. If the APR calculated amount is more than $5 than the customer will be charged the late fee as calculated by APR.

When it comes to late charges, I usually tell customers this: You probably aren't going to make much money charging late charges. You should, however, charge them as it gives your customer an incentive to pay and pay on time - nobody wants to get charged extra money. Now you CAN charge them whichever way you like (fixed, APR, or greater of); however, I always recommend that you charge them via the Greater of Fixed or APR option as its the best way to structure late charges in a way that will always give your customers an incentive to pay you on time.

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