Late Fees vs Finance Charges in SedonaOffice

05/31/2024 9:03 am EDT

When a customer is past due on payment you have the option of charging them a Late Fee or a Finance Charge. There are some key differences between the two.

Late Fees

Calculated on Statements
No general ledger activity unless they are paid
Can be gotten rid of by simply recalculating late fees on the customer, they can be recalculated at $0 if desired

Finance Charges

Calculated on independent invoices using AR Finance Charges feature and generate on their own invoices on the customers account
Have general ledger activity just like any other invoice and will appear as income for your company for which you may pay taxes
Must be either paid or credited

Late fees can be used as incentive for customers to pay their bills, and since they have no GL activity, they can be easily removed from the account if the customer does not pay the late fee itself. The late fee calculation is: Late Fee = (Invoice Total * (Annual Interest Rate / 365)) * # Days Overdue.

Finance charges are better for situations where you expect the fee itself will be paid, and not just used as an incentive for customers to pay their other invoices. Finance charges hit your accounts receivable as soon as they are created and must be credited off like any other invoice if no payment is received.

If you are unsure which option is best for you company we recommend consulting a CPA.