Rather than going after late fees, I’ve found find it quite effective to offer ongoing clients a modest discount if they pay invoices quickly. For example, if our normal terms on a contract were 30 days, we might offer a client a couple of percent off if they paid within a week of the invoice date. This way, clients are at liberty to wait the full period if they want to, but it will cost them a little more for the privilege.
That seems to be enough incentive for a lot of places to pay early, particularly smaller businesses who aren’t on some fixed schedule run by a central accounts department. That in turn reduces the risk to my company, because typically we’ve only worked a little over a month before the corresponding payment reaches the bank, rather than having two full months of revenue at risk if anything unfortunate happens to the client.
Obviously this is all agreed up-front and terms are always negotiable, and for some larger companies this sort of scheme doesn’t help because you’re often looking at a longer payment window anyway. In that case, the basic rule is that the longer the window they want, the more the basic rate goes up and the bigger the up-front deposit before we start work.
I agree. This is an accounting hack when dealing with bigger companies. If you are a little contractor, beancounters will put you at the bottom of the heap to get paid. If you offer a discount for early payment, beancounters will put you back at the top of the heap to save a few bucks. I learned this trick from a plumber.
"Domestic attempts to use financial incentives for teachers to increase student achievement have been ineffective. In this paper, we demonstrate that exploiting the power of loss aversion—teachers are paid in advance and asked to give back the money if their students do not improve sufficiently—increases math test scores between 0.201 (0.076) and 0.398 (0.129) standard deviations. This is equivalent to increasing teacher quality by more than one standard deviation. A second treatment arm, identical to the loss aversion treatment but implemented in the standard fashion, yields smaller and statistically insignificant results. This suggests it is loss aversion, rather than other features of the design or population sampled, that leads to the stark differences between our findings and past research."
That seems to be enough incentive for a lot of places to pay early, particularly smaller businesses who aren’t on some fixed schedule run by a central accounts department. That in turn reduces the risk to my company, because typically we’ve only worked a little over a month before the corresponding payment reaches the bank, rather than having two full months of revenue at risk if anything unfortunate happens to the client.
Obviously this is all agreed up-front and terms are always negotiable, and for some larger companies this sort of scheme doesn’t help because you’re often looking at a longer payment window anyway. In that case, the basic rule is that the longer the window they want, the more the basic rate goes up and the bigger the up-front deposit before we start work.