Running different late fee policies for different customers

Why is one late fee policy always wrong for somebody?

A single late fee policy is either too soft for your worst payer or too harsh for your best customer, because there is no rate and grace period that is right for both. Design for one and the other notices.

If you design it around your best customer, the one you would never want to upset, it ends up so lenient that it does nothing to the customer who is actually costing you money. Long grace period, low rate, applied reluctantly. Your worst payer notices immediately that nothing happens.

If you design it around that worst payer, it is aggressive enough to land on a fifteen-year account who paid four days late because their finance manager was on leave. That costs more than the invoice was worth.

So most people compromise into a policy that is wrong for both, then quietly stop applying it. Late fee policies rarely get canceled. They get excepted to death.

What is a late fee (and what is it not)?

A late fee is a charge a seller adds to an invoice when the customer pays after the due date, as a flat amount, a percentage or interest. It is also called a late payment fee. See the definition of a late fee.

• A late fee is not a late fee policy. The fee is one charge on one invoice. The policy is the rules: the rate, the grace period and which customers it covers.
• A late fee is not a payment term. Payment terms set the due date, such as net 30. The late fee starts only after that date has passed.

This matters because each customer group gets its own policy, and every policy still produces the same thing: a charge added after the due date. Keep the fee and the rules apart, and you can change a group's rules without redefining the fee.

The three groups

Most businesses need three late fee groups: a standard policy at the full rate, a lighter policy for long-standing accounts with a longer grace period, and an explicit no-fee group. Anything finer starts costing more to run than it collects.

You do not need a policy per customer. You need enough policies that no group forces you to make exceptions manually.

The middle group is the one people skip, and it is the one that keeps the policy alive. Without it, every good customer who pays a week late becomes a manual exception, and manual exceptions are how the whole thing erodes.

How should you split customers into late fee policy groups?

Split customers into late fee groups on two signals: payment behavior, measured as average days beyond terms over the last twelve months, and relationship age. Sector and invoice size are the instinctive choices and both are poor predictors.

Sector tells you almost nothing about how a customer reacts to a late fee. Two construction firms on the same terms will respond completely differently, and the difference tracks the relationship rather than the trade.

Invoice size is worse, because it correlates with how much you want to keep the customer rather than with how they pay. Charging small customers harder than large ones is a policy most businesses would not defend if they said it out loud, and it is what size-based grouping produces.

Use two signals instead.

Review the split quarterly. A customer who has moved from paying on time to 40 days beyond terms should move group, and moving them is a clearer signal than gradually applying more pressure inside the same policy.

The no-fee group is a control, not an oversight

Almost every business has accounts that should never receive a late fee. Related entities, a customer already on a payment plan, an invoice in genuine dispute, a client going through something difficult.

The usual approach is to remember. Somebody knows not to charge that account, and it works until they are on holiday, or leave, or the policy runs automatically one weekend.

Make the exclusion a group. It takes a minute, it survives staff changes, and it turns a piece of tribal knowledge into something anyone can see and audit. It also gives you a number: if a quarter of your ledger has ended up in the never-charge group, that is worth knowing.

Is it fair, and legal, to charge different customers different late fees?

Charging different customers different late fees is fair commercially and legal in every market Paidnice serves, provided each customer's fee matches the terms they agreed. No customer is entitled to know what terms another customer has. Where the right comes from decides how careful the paperwork has to be.

In the UK and the EU the right to charge is statutory and automatic on business-to-business invoices. You are choosing not to exercise a right you already have, which is entirely your call.

Almost everywhere else, including Australia, New Zealand, Canada, the United States, South Africa and Singapore, the right is contractual. It comes from your payment terms, so each customer's fee is whatever their signed terms say, within any limit local law sets (for the US, see the limits in each state). If different groups are on different terms, different charges follow naturally. If they are all on the same terms and you charge inconsistently, a customer can argue you waived the term on their account, which is narrower but still an argument you do not want.

How many late fee policies is too many?

Three late fee policies is usually the ceiling, four if you genuinely operate in two markets with different legal bases. Past that you are managing policies instead of collecting money.

The limitation shows up quickly: every extra policy is another set of rules to remember when someone asks why a particular customer was charged a particular amount. The value of a policy is that it removes decisions. A ledger with seven policies has reinstated them.

If you find yourself wanting a fifth, the usual cause is that the standard policy is wrong rather than that you need more granularity.

How Paidnice does this, and how simple it is

Paidnice runs multiple late fee policies at once because policies live under customer groups, so different customer groups run different policies simultaneously. Running several is the normal way to use Paidnice rather than an advanced configuration.

• Each group has its own policy, with its own rate, grace period, fixed fee and charge type, and they all run at the same time.
• Customers land in the right group automatically using contact tags, your Xero group name, or a country filter, so a new customer is not an admin job.
• Grace periods and debt age gates are per policy, so key accounts can have 30 days before anything applies while standard accounts start at day one.
• A policy can be reviewed before it charges anyone. Build it and leave it in draft while it is approved, then set the charges to raise as draft invoices for the first month so you can see exactly what would have gone out.

Setting it up is one group and one policy to start with. Split it once you can see which accounts keep becoming exceptions.

Common questions

About the editorial team

Written by Denym Bird Co-founder & CEO of Paidnice

Denym started Paidnice in 2022 after customers paying late left his own business short on payroll. He has led it to $1 billion collected on time across more than 1 million invoices, and writes about credit control, late fees and getting paid on Xero and QuickBooks.

Reviewed by Ashley Schroder Co-founder of Paidnice

Ashley is a co-founder and lead developer of Paidnice and has built accounting software for more than 10 years. He builds the ledger connections that put reminders, late fees and payments into Xero, QuickBooks and ERPs such as NetSuite and Business Central. Before Paidnice he co-founded A2X, ecommerce accounting software for Xero and QuickBooks.