More than half of Canada’s small businesses are owed significant amounts of money from clients. In fact, according to a survey published by Quickbooks, 61% are owed up to CAD $50,000 in overdue invoices - a startling figure.
Post-pandemic, late payments have become so commonplace that you may well have accepted it as an unavoidable part of doing business. Thankfully, that’s not the case.
Late payments have a significant financial impact on small-to-medium-enterprises (SMEs), but the hidden costs can soon add up too. Accounts receivable staff, bookkeepers, accountants and business owners around the country waste their valuable time chasing unpaid invoices - time that could be better spent elsewhere.
We’re here to explain how charging late fees for overdue invoices can be a powerful motivator for slow-moving clients. Here’s what you need to know.
Please note that the information found in this blog serves to inform but does not constitute legal advice. For information specific to your industry, we recommend contacting a legal professional.
Yes, businesses in Canada can charge late fees on overdue invoices either as a fixed penalty fee or by adding interest at the average bank rate plus 3%. As the business charging a late fee, the onus is on you to ensure that the amount is “reasonable”.
In short, late payment fees should not be exploitative and should simply provide an added encouragement for clients to pay on time. We’ll cover this in more detail shortly.
Keep in mind that although you’re legally entitled to charge a late fee, it’s not enforceable unless certain criteria are met.
In Canada, your clients are only required to pay a late fee on their overdue invoice if they’ve previously signed a contract that lists this fee in your payment terms.
In order to make sure that late fees do the job they’re designed to, make sure you follow the best practice for setting out your payment terms.
In Canada, there is a range of best practices surrounding overdue invoices and late fees, particularly surrounding contract terms, grace periods and when to charge late fees.
Regardless of whether you’re a freelancer, SME or large organization, here are the best practices to adhere to:
As we’ve already mentioned, in order to charge a late fee, your payment terms must have been agreed to by your client. While you can’t charge late fees to your existing outstanding invoices, by putting terms in place today, you can prevent late payments in the future.
Tip: The easiest way to establish payment terms is to include the information in your contract when onboarding new clients.
For existing clients, send your new terms and ask them to agree or, where relevant, incorporate the terms into your ordering process.
See our Examples of Late Fee Policy Wording for advice on this.
In Canada, it’s considered best practice to reach out to your client before applying a late payment fee. While this isn’t a task anyone enjoys doing, it’s often all that’s needed to secure payment - which, after all, is the end goal.
In general, it’s also recommended to give clients a grace period of 30 days after the due date before applying late fees, particularly when interest is involved.
Fixed penalty late fees, which are usually lower in cost, may be applied in a shorter window.
Waiting for a grace period before charging your late fee may be frustrating when your client is already significantly behind on their payments, but it serves a purpose.
Not only does it show your client that you are reasonable (and therefore avoid any ill will), but it also ensures you don’t look unprofessional if there is a genuine reason for the delay.
Nine times out of ten, a client who hasn’t been charged a late fee before will get in touch when they spot the additional charge.
At this point, assuming they’re apologetic and rectify the issue promptly, it’s good practice to waive the late fee.
This keeps your relationship strong, and you’ll usually find that they won’t make the mistake a second time.
Now that you understand the best practices surrounding late fees let’s explore how much you can charge for late fees in Canada.
To begin, keep in mind that late payment fees are only there to serve as a payment aid, not a secondary revenue stream.
Tip: The goal of adding late fees to an unpaid invoice isn’t to increase your income, but to motivate your clients to pay promptly.
With this in mind, the late fee should be enough to deter late payment but not enough to elicit hard feelings.
If you are dealing with overdue invoices for amounts lower than CAD $1000, it’s probably not worth your while charging interest as a deterrent. Instead, for low invoice balances, we recommend setting a fixed late payment fee of approximately CAD $20-50 per invoice.
If you are invoicing for larger amounts at CAD $1000+, interest-based fees are the better way to encourage prompt payment. In Canada, an interest rate of between 1.5 and 4% is common for a late fee.
There are, of course, a range of late fee calculators you can use to calculate daily interest rates on an invoice’s balance, but who has time for that? In fact, the sole reason that many SMEs don’t routinely charge late fees is because of how much extra work is involved. That is, until now.
Adding late fees to overdue invoices is one of the most effective ways to encourage prompt payment, but doing so can create a lot of unwanted admin. If your accounts receivable team is already over-stretched, bringing late fees into the equation may seem like too much of a headache.
Xero, Canada’s most popular accounting software, notably doesn’t have the option for late fee automation.
Paidnice is a Xero-compatible software program that sits within your accounting software and makes it possible to automate the entire late fee process. With the option to add fixed or interest-based fees and to group clients by payment terms, we give you complete control, with minimal effort required.
Paidnice clients get paid 40% faster than those using Xero alone, making it a valuable addition to your accounts receivable platform.
Step 1. Work out the type of late fee you'll charge
Decide whether you’ll charge a fixed or interest-based late fee and at what rate you will set it at.
Step 2. Setup your late fee policy
Next, create a late payment policy and send it to your customers for them to agree to. For help with writing your policy, see our examples.
Step 3. Get started!
Then, implement your late fee policy by manually implementing your fee on overdue invoices each time they go overdue.
Optional: Automate your late fees with Paidnice!
Paidnice is a Xero app that will automatically detect when your invoices go overdue, and issue your customers a penalty, either a late fee or an interest charge, and either add this to your existing invoice as a line item, or issue a new invoice as a penalty.
Want to see Paidnice in action? Watch our tutorial video and learn more about getting started with Paidnice today.
Please note that the information found in this blog serves to inform but does not constitute legal advice. For information specific to your industry, we recommend contacting a legal professional.
