It seems to be fairly common for freelancers to charge late fees when payment is not received as prescribed by contract.
Frankly, I don’t understand this practice.
In this article I outline the problems I see with late fees. I’m open to being shown the error of my thoughts, so please enlighten me with your comment.
How late fees work
Let’s say that payment is due 30 days after final invoicing. And let’s further say the tab totals $1,000. If payment is not received by the 30 day deadline, the contract may specify a late fee of 1.5% per month. In this case it’s $15. This 1.5% per month works out to 18% annually if payment is postponed, let’s say, a year.
The interest is substantial, but to the freelancer, it’s peanuts. Any reasonable freelancer would much prefer to get the $1,000 promptly than $15 per month for a year. Whether you are working to pay this month’s electric bill or save for retirement, the cash in hand is what counts today.
Why late fees work for credit card issuers
Charging such fees works for credit card companies, you may say.
True, but there are some differences between financial companies, such as credit card issuers, and freelancers, who certainly are not in the financing business.
The most important is that the credit card holder pays on the bill every single month. When a month passes with no payment at all, there is a penalty ranging from an additional charge to rejecting any additional purchases on the card. Therefore, money is always coming in and the consumer must actually remit something monthly. In addition, credit card companies have clout and regularly report collection problems to the credit rating agencies.
In contrast, even if the party owing money does not object to the freelancer’s late fee, it doesn’t guarantee that any money will ever be forthcoming. They may be fine with the fee because they have no intention of paying up.
What power can the freelancer exert to speed payment?
In reality, almost nothing.
There are phone calls and other follow up, but these may elicit a simple yawn.
There’s the refusal to do further work until payment is received, but many past clients would rather go on to the next freelancer and restart the same cycle with someone else than pay up to get more work done. Anyway, you would demand full payment upfront next time, wouldn’t you?
Maybe you could report it to some online website that posts such problems and identifies deadbeats, but this may help the next person investigating the prospect more than it helps you collect.
There’s the possibility of small claims court, but success stories are exceedingly rare, in part because our clients may be far away from us geographically. Also, taking action is expensive in terms of both time and money (if we hire an attorney); a bill of $1,000 may feel substantial to us but insufficient to justify full-out legal action. Nor does winning the case assure they will actually pay.
To put it simply, adding late fees assures neither payment of the original invoice nor collection on the fees.
As a freelance writer specializing in the insurance and asset management industries, it’s important that I understand how money works. I can’t claim subject expertise if I can’t see the importance of collecting my fees in full and on time. I don’t charge late fees because adding these fees to the account may appear to put the client in compliance with the project contract even though no money has been received—and perhaps never will be received.
Originally posted 1-15-17