What Is a Back Charge?
A back charge is a billing made to collect an expense incurred in a previous billing period. It can be due to lack of payment by the recipient of services or goods, an adjustment due to an error, or to collect an expense that was not billable until a later period due to timing issues.
A vendor can, at its discretion, add a late fee or other additional charges in conjunction with a back charge that is due to an unpaid bill.
Understanding Back Charges
Back charges are most commonly seen in industries when accidentals occur, such as construction, credit cards, and manufacturing. Because of the nature of these industries and the tendency for many things to go wrong during day-to-day business, a back charge is issued either in real time or further down the billing cycle.
Credit card companies, banks, and other lenders are notorious for not notifying their customers of a back charge. This is due to the fact that they are able to make additional money off the interest of those back charges. Since interest accrues daily, this can amount to a sizeable sum.
When issuing a back charge, it is considered ethically correct to let the client know as soon as the charge is incurred.
When possible, it is best to avoid having to back charge for products or services. Because back charges may be unexpected by customers and can be confused with billing errors, they often take longer to collect. In general, the more promptly a company can bill a customer, the higher the probability of collecting the billable amount in a timely manner.
Example of a Back Charge
Assume George has a business selling applesauce, and XYZ grocery purchases two boxes of George's applesauce every month. However, XYZ recently came under new management and forgot to pay George's invoice for September applesauce. George isn't aware and delivers the September order of applesauce anyway.
On the invoice for the October applesauce, George includes a back charge for the still outstanding September applesauce charges. XYZ may simply accept the charge, but more often than not a back charge brings unwanted anger—sometimes even litigation—if it is not discussed upfront. It is also for this purpose that George hopefully made someone from XYZ sign for the delivery, so he could show he delivered it to XYZ as he always had.