Small-to-medium enterprises (SMEs) keep South Africa’s wheels turning. In 2022, they accounted for approximately half of the country’s workforce and over 20% of its GDP.
However, without the resources enjoyed by larger organisations, SMEs are more at risk of collapse and can find themselves walking a fine line between success and failure. The most significant challenge? The late payments of invoices.
Not only do late payments have a very real financial impact on SMEs, but the hidden cost can quickly add up. Accounts receivable staff, accountants, bookkeepers, and business owners around the country waste valuable hours every week chasing unpaid invoices - time that could be better spent elsewhere.
So, how much are late payments impacting the average South African business? And how can you ensure your SME doesn’t become a cautionary statistic?
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.
A Xero survey interviewed over 500 South African SMEs in varying industries to better understand the impact of late payment culture on our nation’s businesses.
Shockingly, it found that 91% of companies were owed money at any given time, at an average rate of nearly R100,000.
Late payments are often the pivotal factor leading to negative cash flow and putting businesses in a precarious financial position. Not only do cash flow issues prevent SMEs from expanding or investing in their business, but they jeopardise the company's day-to-day running.
The impact of late payments can even have a long-term knock-on effect, affecting credit scores and reputability.
Of the 500 South African businesses surveyed, 20% reported struggling to pay their suppliers due to cash flow issues caused by late payments, and 17% had considered declaring bankruptcy as a result.
With late payment culture such a widespread problem, many SMEs are adopting late payment fees to break the cycle.
Yes. Late payment fees are legal throughout South Africa. For the majority of industries, the law doesn’t specifically outline what you are entitled to charge in late fees.
However, guidance is very clear that the onus is on businesses to ensure any fees charged are considered “reasonable”. Late payment fees should not be exploitative and should simply provide an added encouragement for clients to pay on time.
It’s important to remember that, despite being legal to charge a late fee, it’s only legally enforceable if certain criteria are met. If your client has not signed a contract that stipulates you will charge late fees on arrears, they aren’t obligated to pay it.
To ensure that your clients are encouraged to pay their invoices on time and in full, follow best practices when setting out the payment terms in your contract.
The best practices for charging late payment fees in South Africa cover three parts of the process:
In order to charge a late fee, your client must have agreed to your payment terms in writing prior to any work being undertaken. The easiest time to broach this is when onboarding new clients.
Tip: Include a section on payment terms within your contract, stating that, for example, “payment terms are net 30 days, subject to a 2% monthly late payment fee”.
For existing clients, you can ask them to sign a new contract retroactively, or add it into your ordering process. Learn more about contact terms, including examples that you can use here.
In South Africa, the best practice is to give a grace period of 30 days after the due date before charging late fees.
This is particularly true of charging interest on overdue invoices. Fixed penalty late fees may sometimes be applied in a shorter window, say after 14 days of non-payment.
This grace period may seem frustrating when your client is already behind on their invoice, but it serves an important function.
First, it shows your clients that you are reasonable, making them less likely to push back against late fees if they’re applied.
Second, it ensures you don’t look unprofessional if there is a genuine reason for the delay, such as a cheque being held up in the postal system.
Assuming that your client agreed to payment terms before the service is rendered, as a registered company in South Africa, you are entitled to charge interest on overdue invoices.
As per best practices, the late fees charged in South Africa should be considered “reasonable”.
But what is a reasonable late fee in South Africa? How do you know what to charge? Let’s explore that in a little more detail.
Now that you know the best practice for charging late fees, it’s time to look at the figures in more detail. How much can you charge? How do you work out the interest fee? What’s considered “reasonable” in terms of late fees?
First and foremost, it’s crucial to remember that late payment fees should be a proverbial carrot, not a stick.
The purpose of the fee is to motivate your clients to pay on time, not to bring added revenue into your business.
With that in mind, the fee shouldn’t be nominal or exorbitant but somewhere in the middle.
If you are dealing with overdue invoices for amounts lower than R10,000, 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 R200 per invoice.
If you are invoicing for larger amounts at R10,000+, interest-based fees are the better way to encourage prompt payment. A rate of anywhere between 1.5 to 4% of the total invoice amount (per month) is normal.
Charging interest or fixed penalties for late payments provides a powerful solution to SMEs, yet many companies aren’t using this to their advantage. Why? Because it’s been too manual a process - until now.
Charging late fees is an effective way to encourage prompt payment from your clients. However, the added admin involved can deter many SMEs from integrating fees into their invoicing procedures.
If your current accounts receivable software doesn’t offer late fee automation, you’re not alone. While Quickbooks offers some basic functionality, Xero, despite having over 3 million subscribers, does not.
Being Xero users, the Paidnice team set out to meet a need - namely, to offer the option of automating late fees. With the option to add fixed and percentage-based late fees to existing or separate invoices, Paidnice gives Xero the added functionality it’s been missing.
Businesses using Paidnice get paid 40% faster than those without, making it an essential addition to your accounts receivable platform. Here’s how it works:
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.
