While extending credit to customers is a necessary evil in many types of small business these days, there are a wide range of policies and procedures used by those creditors. One of the most commonly disputed policies is whether or not you should charge your clients a fee for late payments.

Charging a late fee is a scary line to cross for many small businesses, and how much that late fee should be is an even tougher question to answer. But if you are open to the idea of improving the collection side of your business, we have put together five key reasons that you should start charging fees for late payments immediately.

Establish Professional Relationships

First impressions are everything in the business world, and putting together a credit policy that includes penalties for late payments will get you instant credibility in the eyes of your customers.

Because most people don’t ever anticipate falling behind on their payments, they almost never flinch at the thought of a late fee when you are just establishing a relationship, but those fees will force them to think of you as a professional operation, rather than a small, mom-and-pop outfit.

Discourage Late Payments

Having late payment fees built into your credit contracts will also help you to discourage customers from making late payments in the first place.

Just the threat of a late payment penalty will instantly make your invoices and due dates far more important in the eyes of your clients, which will ultimately result in an overall reduction in the number of late payments.

Get Paid First

When a particular client has enough money to pay one out of their five bills, they are almost always going to choose to pay the one that will penalize them for not paying.

For that exact reason, having late payment fees will allow you to put yourself at the front of the line when a struggling customer is debating who to pay and who to put off.

It’s also important to remember that all of the major companies you are competing with for those limited dollars are also going to be charging late fees, so the one who doesn’t charge those late fees is the one who isn’t going to the paid.

Compensation for the Aggravation

No matter how you cut it, chasing people who are paying their bills late is endlessly aggravating, and you deserve to be compensated for the aggravation that they are putting you through.

When you look at late fees from this angle, you can see that they are more a cost related to the effort you have to put into contacting a delinquent account than a penalty for the account falling behind.

Improve Cash Flow

Making money off of things like late payment fees definitely isn’t what you got into business for, but there is nothing wrong with adding a couple of extra dollars to your bottom line at the end of the day.

If you happen to have clients who are behind on their payments every month, late fees can actually add quite a bit of revenue to your profit and loss statement when you add them up over an extended period of time.

The amount you choose to charge for a late fee will always vary based on your local regulations and the type of business you operate in, but make no mistake about it, you definitely need to be charging your customers when they fail to live up to their end of a business arrangement.

And if you need help implementing or enforcing late payment fees, you can always partner with a reputable debt collection agency to handle that for you.