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An informal, stream-of-consciousness reflection on business ideas, events and issues in modern business, modern life and with some specifics to the web-software industry by Paul Tomori, Internet Entrepreneur

So, You Don't Pay Late Charges On Your Past Due Account, Huh?
You Are A Thug.

By Paul Tomori
Wednesday, August 03, 2011 at 11:54:03 (EDT)

No one likes to pay interest. On the surface, it just feels like you are burning money when you pay interest, right? However, I would like to write a little bit in defense of the despised late payment charge. It may be a nuisance, but it is totally necessary.

For about the first 10 years of my business, we did not charge interest except in one case. In fact, we did not even have an interest calculating module in our accounting system (which I personally wrote the software for). Occasionally, we would experience late payers and even complete deadbeats sometimes, but we coped well enough and we took pride in not being so "corporate" as to charge interest. Meanwhile, during that time, if we were ever late paying one of our vendors, we got hit with late payment fees. Heaven forbid being late to the tax department - their late charges are stiff and their mentality completely unforgiving (try telling the taxman that you'd love to pay them, but that you are waiting for some big customer checks to come in first)

Then the economic crisis came along in 2008 and as Warren Buffett says, the economic tide went out, and it revealed a whole bunch of people who had been swimming naked the whole time (i.e. living on borrowed money). For us that translated into a notable increase in late payers. I am not so sure that these customers didn't "have the cash". I believe most of them were just too damn scared to part with it, even though they ought to have on principle. However, some of them clearly were (and still are) swimming naked and we began to feel a carryover of their pain. Let's just say it sucks to be repeatedly asking a few customers to pay their bills, especially when some of those customers are friends or even family. Fortunately, 99% of our customers are excellent business people with whom we have mutual respect.

To deter late payments from becoming the new norm, we did what every business that I have done business with has done - we started applying automated late charges on invoices that went past their due date. We did this with some trepidation about the possible outcome. Would our customers despise us? Would there be a revolt? Would we lose customers in droves? So, what happened? Nothing. Nothing dramatic anyway. Most people continued to pay on time and in the few cases where interest got applied all of the decent folks paid them without even an utterance of complaint.

As it turned out, most people respect the necessity of late payment charges. They know that by paying late, they have deprived their supplier of revenue that the supplier in turn needs to meet its own obligations. Most people know that if they are paying their bill late, they have effectively "borrowed" money from their supplier. The trouble is, suppliers are not banks. It is not their business to be "fronting" or loaning cash to their customers. So, charging late fees or interest is a necessary exercise simply to get compensated for having fronted cash.

I have always paid late charges without complaint, because I intuitively knew that I had breached the expected payment terms and that I really did simply owe the fees. Afterall, I am adult who entered into these contracts knowing that any lateness on my part would be subject to extra fees. However, now, I understand the concept of late fees from a more philosophical perspective. I am now a charger of late fees as well as an occasional payer of late fees.

You know, I can see why some companies have payment terms of 45 days or 60 or longer. Perhaps they are in industry and they have long production/delivery cycles and they must coordinate between multiple suppliers to produce and deliver their products. However, we are not part of that cycle in their business. We are like a phone company who provides real-time service and who needs to be compensated in as close to real-time as possible.

Strangely, of the few late payers we have, some of them actually run businesses that collect their revenues from their customers on the same day that services are delivered. These companies collect all of their cash upfront from THEIR customers or at least they collect before the customer walks out the door. So, why would these clients hold back their payments to their own suppliers (like us) for (in some cases) months? Reason: because we let them... for years. Yes, my own words come back to haunt me. No one takes advantage of you without your permission.

What has been shocking to me is that a few grown adults, experienced business people, have taken the approach that they simply "do not pay late charges". Here's a snippet of a recent conversation with a customer who I used to have more respect for:

Customer: Hello Sir. I am calling on behalf of XYZ Incorporated about the late charge that appeared on our account last month.

Me: Yes? Was there a problem with the charge?

Customer: Yes, there is a problem. The owner doesn't pay late charges.

Me: Ok. Is there a reason for that?

Customer: Yes, we do not pay late fees on principle.

Me: Really? What is that "principle"?

Customer: The principle is that we DO NOT PAY LATE CHARGES and we think it is ridiculous that you are charging us.

Me: That doesn't really sound like a "principle" to me. Is your invoice outstanding or was your invoice paid past the due date?

Customer: That's not the point.

Me: Well, let me consult your account. Hmmm... It seems you were definitely late in paying. We have a 30 day payment requirement and after that, late payment charges get automatically applied. So, I do not see any error at our end.

Customer: Yes, but the late charge is only for 90 cents.

Me: I agree the amount is small, but it was not charged in error. And, if it is so small, why not just pay it?

Customer: Yes, but it's ONLY 90 cents. We deal in tens of thousands of dollars here.

Me: It may only be 90 cents, which I agree is a small amount. However, your 90 cents plus some other late payer's $10 plus some other late payers $3.50 and so on actually adds up. When our customers pay late, it impairs our ability to meet our own obligations. However, the sum total of the interest we collect helps to offset the interest we have to pay to our vendors, when you make us late by not paying on time. Besides, like I said, if it's only 90 cents to you and if the amount is so tiny relative to the big checks you write, then why not just pay it?

Customer: So, you expect us to write you a check for 90 cents?! That's outrageous.

Me: Oh no, we don't expect a check for 90 cents. It would cost you $10 to write us a check for 90 cents, so no, we are not unreasonable. However, you could have included the 90 cent late charge on the same check as was used to pay your last invoice. But, it's ok if you just tack that payment on to the next check you issue.

Customer: That will not be happening. Like I said, we simply do not pay penalties and we hereby demand that you remove this charge from our account.

Me: Well, our policy is to treat all of our customers with equal respect. We do not play favourites and we do not even view the late charge as a penalty really. Instead, we view it as an offset to help us counteract the late fees we get charged by our own vendors.

Customer: Well, that's our position and if you don't like it, you can speak to the owner.

Me: Ok.

Owner: What's all this nonsense about you charging us a late fee?

Me: Hi Steve (not his real name). Your account was paid late and a late fee was automatically applied to your account. I have reviewed the details and see no error at our end that would call for us to strike the charge.

Owner: Well, I have NEVER paid late charges to anyone and I never will.

Me: I find that hard to believe, but besides, there would not be a late charge if your account were paid on time, so truly, you are empowered to avoid such charges easily in the future. The majority of our customers pay us by credit card within a couple of days of being invoiced. Almost all others pay by check long before the due dates.

Owner: Well, aren't you looking at the small picture? I am a big picture kinda guy and I will tell you right now, I don't pay interest. If someone tries to charge me interest, I threaten to take my business elsewhere.

Me: So what you are saying is that you don't value our services enough to honor our payment policies, which by the way, are industry standard. In the big picture, you are better off with us as your supplier and you can maintain that relationship by being respectful of our invoicing policies. We are not doing anything unusual. If we pay our phone bill late, we pay the interest charge without complaint. Likewise, if someone pays us late, we in turn charge them the interest. We pay late charges and we collect late charges because it's the right thing to do, on principle.

Owner: (shouting) Well I don't appreciate you harassing my accounting department and hounding us for 90 cents! It's ridiculous and I won't stand for it.

Me: Actually, Steve, your accounting department called me. I didn't even know that you had this outstanding charge til today.

Owner: If this is the way you conduct business, we may not be doing business together much longer.

Me: Oh, so you are a thug who uses intimidation tactics to deprive your valuable vendors from what is owed to them. You acknowledge your account was paid late and you offer no legitimate reason for why a late charge should not be applied. You expect us to be motivated out of fear of losing you as a customer into making an exception just for you even though the majority of our customers have paid their bills on time and in some cases have paid small interest when they are late. You are not a business person. You are a bully. (ok... I didn't actually say this, but I sure did think it!)

The most amusing (or irritating) part of the conversation was this idea that this person was "acting on principle" by refusing to pay the interest charge. Yet, they offered no real reason, nor actual principle except to figuratively stomp their feet while literally raising their voice... like such actions would be persuasive. Anyway, the matter does not have closure yet, but I think I know how it will play out. Word of advice: be respectful to your vendors and suppliers just like you are respectful to your staff and customers and if you can't or won't pay your vendors on time, then pay the interest without complaint. It's simply the right thing to do, on principle.

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