Charging Late Fees

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“We started charging late fees four years ago and it has made a huge difference in our receivables,” says Teddie Salko. Along with husband Chris, Teddie manages an active lesson program at Salko Farm and Stables in Southport, Connecticut. Even in an affluent county, Salko noted, she was having trouble with people paying late or simply not paying at all. “We had receivables as high as $10,000,” she says.

Then a conversation with another stable owner convinced her to try late fees. Now, clients pay for five lessons in advance. After the third lesson, Salko bills them for the next set of lessons. If students go three lessons into this next set without paying, she assesses a $10 late fee per lesson.

Adding these late fees to bills has dropped her unpaid receivables to around five percent. “People hate late fees,” Salko says. “Sometimes people don’t pay the late fee, but they pay their basic bill and then they start paying on time. That’s OK with me.”

Salko has company in using this tactic. “Late fees are a very touchy issue and I have extremely strong feelings about them,” says breeder and certified equine appraiser Michelle Stallings of Stallings Paint Horses in Aubrey, Texas, where she and her husband trainer Ronnie Stallings cater to horse owners who are actively showing. Stallings assesses a late fee of 1.5 percent on any balance that is 30 days or more overdue. On a bill of $1,000, that’s $15.

Stallings agrees that clients resent late fees. (That’s what makes them so useful.) She notes that horses are just a hobby for most owners, and feels their resistance to late fees means that they do not fully understand the services they are receiving.

To explain the need for timely payment, she points out that stable operators must buy bulk quantities of shavings and feed, store them until needed, and often invest in expensive equipment to handle them. These services are not detailed on invoices so they are “invisible” to most horse owners. “If they don’t pay, we don’t stop feeding their horse,” she says. “People need to get a different mindset.” Late fees make the point.

Stallings notes that, financially, the stable owner gets behind twice when clients do not pay on time. Not only has the owner paid up front for supplies and labor, but must also dip into cash reserves to keep paying the business’s other bills in a timely manner.

“I’m a big fan of late fees,” says equine lawyer and author Julie Ferstman of Fink, Zusmer & Kaufman in Farmington Hills, Michigan. She regards late fees as compensation for the extra paperwork and extra trips to the bank that result when payments are late.

Ferstman notes there are pros and cons to charging either a flat fee or a percentage of the unpaid balance. A reasonable flat fee charged whenever bills are not paid in a specified time frame is easy for clients to understand and for business owners to administer.

Businesses charging percentage fees need to vet their contracts carefully, she says, to make sure that their use of late fees does not subject them to state usury laws (which regulate maximum interest rates). The usury rate varies from state to state, Ferstman notes, and many of the form contracts circulating in the horse industry cite interest rates that would be illegal in some states. (To research your state’s usury laws, go to www.findlaw.com or www.nolo.com, call your state officials, or contact your legal advisor.)

As a rule of thumb when figuring late fees, most people take the highest interest rate allowed in their state and divide it by 12 to come up with a monthly rate. If their state’s usury laws allow 18 percent interest, they divide by 12 to come up with a late fee of 1.5 percent per month. Because of compounding, this rate would technically put them over the usury cap if they charged it for a year (1.5 percent compounded for a full year yields 19.5 percent). However, a prudent business owner will not keep adding late fees to unpaid bills for more than a month or two before ratcheting up their efforts to collect the unpaid balance.

Pre-Payment Plans

When Stallings first started out, she billed at the end of the month for services performed that month. She quickly learned to pre-bill. Otherwise, she says, the business owner is financing the client’s hobby.

There is also no reason why trainers cannot bill for show fees in advance. They know which classes riders will enter, how many judges there will be for each class, how many days the horse will need a stall, how many bales of shavings the horse will need daily, and the mileage that will determine the hauling charges.

Kathy and Mary Lovingood go a little bit further in asking for pre-payment from boarders at their Lovingood Springs Farm in Louisville, Tennessee. They ask new clients to pay both the first and last month’s board in advance. That way, they say, you always have the last month’s rent before they announce they are leaving at the end of the month (or you ask them to leave).

“Paying two months up front is a big hit all at once,” Kathy admits. However, it also helps weed out boarders whose financial situation might be shaky to begin with. During slow times, it might pinch a little to see people walk away but, says Kathy, as they have looked back over time, that has always been the best thing for business in the long run.

Like Salko, the Lovingoods also get pre-payment for lessons that new members of the Lovingood Springs Farm Trail Riding Club are required to take until the sisters feel the newcomers are ready to tack up and ride on their own. Students pay at the beginning of the month and get lesson tickets to bring to each week’s lesson. That minimizes bookkeeping, Kathy notes.

Discounts

Like Salko and the Lovingoods, Chrislar Farm manager Lynne Pomerleau also gets pre-payment for lessons. Students deposit enough funds for four lessons at a time. When they come for their third lesson, they’re reminded to make another deposit at their next lesson.

For boarders, however, she prefers the carrot of a discount to the stick of a late fee. Board is due on the first of the month. If they pay before the first, they get a $25 discount; after the first, they pay the full amount. “Only about two out of 20 boarders don’t take advantage of the discount,” she says.

Equine tax accountant Patrick Hurley of Patrick Hurley and Associates in Yorba Linda, California, likes the concept of discounts, but notes that the rules for qualifying for the discount must be clearly written and enforced. Otherwise, clients may abuse the privilege, and then the discount becomes an ineffective tool.

Pay As You Go

“I don’t do late fees because I don’t let it happen,” says Wynona Mason of Branson West, Missouri, an American Riding Instructors Association certified instructor in side saddle, stock seat and saddle seat.

Her solution has been to follow the lead of a music teacher who gave piano lessons to her children. The woman had a rule that payment, in correct change, should be left on the piano at the end of each lesson. The woman insisted that she wanted to teach piano, not be a bill collector or a banker.

Like that music teacher, Mason says she wants to teach, not be a bookkeeper, and she does not like to hassle people about payment.

So Mason’s students pay at the time of their lesson. If people want to pay ahead, she prints out gift certificates. “They use them the same as cash,” Mason says. “They have to keep up with their money, not me,” she says. “If they don’t come for a lesson that week, I don’t have any bookkeeping to track.”

The Lovingoods use a similar arrangement for the members of their Lovingood Springs Farm Trail Riding Club. Members pay when they ride. If they want to pre-pay so they do not have to bring cash to the barn, the Lovingoods issues tickets which members leave on the bulletin board when they come to ride.

Automatic Payments

Eventually, says Kathy Lovingood, she would like to amend the farm’s contracts so that the farm can bill boarders monthly on their credit or debit cards. Even if the card servicing company charges two percent of the transaction, she says, the fee would be worth the savings in time.

Very few stables are set up to accept credit cards, but the process is not complicated, says J. Michael Powell of Galt Valley Card Services in Knoxville, Tennessee, who rides at Lovingood Springs Farms. It’s much like calling the phone company to get service and then buying phones so you can use that service.

First, the stable owner fills out an application with his or her bank or another financial services company. The bank or financial services company will run a credit check and your credit rating will determine the percentage rate, usually ranging from 1.9 to 2.3 percent, your business will pay for the service. Once accepted, the stable owner buys, rents, or leases the equipment needed to swipe cards and transmit payments electronically. Equipment can run $700 to $900, Powell said. The expense can be depreciated if you buy equipment, or written off against income if you rent or lease.

As a payment solution, Powell points out, credit cards make it simple for people to pay on time without the hassle of finding your bill, writing a check and mailing or hand delivering the payment. Credit cards also make it simple for the stable owner to get paid on time. The contract between the stable and the rider can specify how the rider will be billed for lessons or on what day of the month the credit card will be charged for board.

Good Books, Good Contracts

Timely billings are one of the most critical tools stable owners can use to encourage timely payments. Business owners have to keep good records, says Teddie Salko. You should know, from an accounting standpoint, who took a lesson on a given day and who cancelled for any reason.

Stallings feels that, as a professional, she has a responsibility to give her clients a bill as detailed as the receipt they get when they shop at a retail store. They are a consumer and they have a right to know what they are buying, she says. She uses Quickbooks accounting software to prepare monthly statements that detail any pre-paid board, show fees and training fees. She also provides details on any extra services provided for the horse during the prior month, including veterinary or farrier care.

Stallings believes that a bill clearly detailing the goods and services a client is paying creates a better business environment. That, in turn, encourages clients to behave in an equally businesslike manner and to pay promptly.

And speaking of being businesslike:?Ferstman advises stable owners to give receipts for each payment they receive, and not to assume that a cancelled check is the same as a written receipt.

Clear, detailed written agreements are another valuable tool for stable owners to keep the cash flowing in a timely manner. Boarding and training contracts should be standard operating procedure, but even lesson students should sign written agreements outlining the services the stable will provide, how students will pay for them, and any other rules and regulations the stable intends to enforce.

Ferstman encourages stable owners to check their contracts to make sure that they say what the owner intends and are enforceable. For example, if a contract states that board is due on the first day of the month, does the stable owner mean that the payment must be received in the office? Or will a postmark suffice? The contract needs to be clear about what the client must do to avoid the late fee or earn the discount. If the barn has a cancellation policy for lessons, the written agreement should clearly describe what the student must do to avoid paying for missed lessons.

Written agreements are critical to getting paid because without them, the stable owner has nothing to enforce. If fees or payment terms change over time, both parties need to sign either an amendment to the previous contract or a new contract.

Written contracts that list payment terms and that make it clear the stable owner has the right to collect overdue payments by whatever means are legally available put some backbone into the stable’s business agreements. Hurley advises stable owners not to wait too long before enforcing the payment terms in their contracts. Every stable owner should know the small claims court dollar limitation in their state and make sure that they do not allow any unpaid bill to go over that amount before they take action. If the delinquent client doesn’t show up in small claims court, the stable operator can get a judgment against them which can be turned over to a collection agency.

Ferstman advises stable owners not to make exceptions to their contract terms, even for preferred clients. Forgiving one person’s late fee, or giving someone a discount when they failed to meet the requirements for earning it, erodes the integrity of the contract, she points out. What was a favor to a friend could come back to haunt you if a quarrelsome client later uses it as a reason why they, too, should be allowed to ignore contract terms. Set your payment policy, make it clear to clients you will enforce it with an even hand, and you will keep the spigot open so cash can flow more easily to your bottom line.