When a customer does not pay within 30 days, what fee should I charge? What models exist out there that are common to the software development world? How would VERY late payments work, such as 6 months late, etc.? Compounded interest?
Over here in the UK we have a statutory regime (link) for charging interest and fees on late commercial debts.
This provides that:
If you haven’t already agreed when the money will be paid, the law says the payment is late after 30 days for public authorities and 60 days for business transactions
The interest you can charge if another business is late paying for goods or a service is ‘statutory interest’ - this is 8% plus the Bank of England base rate for business to business transactions.
plus an admin fee.
However, invoking such legislation is perceived as being a one-way bet on never getting any further work from that client, so use with caution!
You definitely do NOT want to be figuring this stuff out when the client is already late. If you don't have a contract that stipulates late fees, then maybe you need to take Peter's tactic of just being satisfied that they pay. My (US-based) contracts state the following:
Late payment is subject to an additional fee of 5% per month. In the case of late payment, you will be responsible for all debt collection fees.
I also have a system set up so I remind folks before their invoice is due, the day after it's due and repeatedly thereafter. I've only had to tack on the late fee once, but there was no dispute over it and the client is with me today.
For such late payments, you should be lucky if you get the money they owe you. I would not count on any fees for being late payers. You're not a bank or something like that.
The only case you can get interest is if you are in the same country and you have a signed contract. Then you can deliver the case to the court and you will receive the money they owe you + interests stipulated by the Law of your country.
The best thing you can do is charge them more next time, just because they were late.
Any for god sake, use some escrow service. Or better yet, don't start working on new milestone, before they either pay you or load money to escrow.
PS. If you somehow manage to agree with them late fee, then use the late fee from the Law. No need to invent the wheel there. In my country, this rate is 1% for every month being late.
In the US 1% to 1.5% per month (simple, not compounding) is not uncommon. It's usually stated on the invoice and the quotation. In general if it is not there, it is going to be hard to collect.
The point of having a late fee is to encourage people to be timely with payment. There are, after all, three kinds of customers who pay late:
Those who don't care
Those who are disorganized
Those who are short on money.
Now, mentioning a late fee in the invoice isn't going to affect the third category (and if you have trouble collecting you should assume your customer is there), but it does help prevent the first two from falling in there. In short, the purpose of a late fee is not to collect it but to prevent late payments.
Now, if you find yourself with a customer in the third category, the best thing to do in my experience is to offer to waive the late fee in exchange for a payment arrangement. In general, this is also a sign not to do further work for this customer absent payment up front, but the late fee gives you some leverage there. Thus far, I have only had two customers (and about a total of less than $2k) that I have had to write off after such attempts.
Most people don't like being late with payments. Late payment fees are a way of adding a little bit of bite to the expectations. It doesn't have to be a lot.
For EU countries you can charge about 8-9% (annual), usually starting 30days after invoice date.
A calculator and the rules can be found here: http://europa.eu/youreurope/business/sell-abroad/payments/late-payment/index_en.htm