9 Min. Read
July 23, 2024
Late payment is a big problem for small businesses and freelancers who rely on prompt payment to maintain a steady cash flow and pay the bills. One of the most effective ways your company can encourage clients to pay on time and avoid late payments is to begin charging late fees on invoices.
To charge late fees, you should first research how much interest you can charge in your state. Then, chat with each of your clients and notify them of your new late payment policy. Once you’ve let all your clients know you’ll be charging for late payment, add the specifics of your late fee policy to the payment terms section of your invoice.
Explore these topics to learn how to charge late fees on an invoice and get paid faster for your services:
What Are Late Fees?
What Is A Reasonable Late Payment Fee?
How To Charge Late Fees on an Invoice
How Much Can I Charge for Late Fees?
How To Calculate Late Fees on an Invoice
Get Paid On Time With Invoicing Software
Frequently Asked Questions
What Are Late Fees?
Late fees are a type of interest or penalty added to your clients’ unpaid invoices. Based on the payment terms you set out from the beginning (and provided that your clients know about them beforehand), you can add late fees to the bill at your discretion.
While there are some laws around the amount you can charge, the other details are entirely up to you. You can decide whether to offer a grace period for first-time late payments, if you charge a flat fee or a recurring percentage fee, and how your overall late fee payment process will work.
What Is A Reasonable Late Payment Fee?
Typically, a low, percentage-based late fee is used when a payment is overdue on an invoice. Late fees usually range from 1% to 2% monthly interest rate, so staying near that range is the most reasonable approach.
Of course, some industries work very differently and may have higher monthly rates, so always be sure to research when deciding how you’ll charge late payment fees.
Another thing to bear in mind: most countries and American states have laws surrounding the maximum amount for invoice late payment fees. See what laws apply to you to ensure you don’t get in legal trouble by mistake when requesting overdue payments from clients and customers.
How to Charge Late Fees on an Invoice
Charging late fees encourages clients to get in the habit of paying their invoices on time. Here’s a step-by-step guide to charging late fees for your small business:
Do Your Research
Before you dive in and start charging clients late fees on their invoices, it’s crucial that you do your research. Find out how much you can legally charge as a late payment interest rate to avoid legal issues. Maximum interest rates vary from state to state, but this helpful guide to usury laws can help you determine how much you can charge by law.
If you have a local network of contacts who run businesses similar to yours, you can ask around to see what others charge for late fees to determine the going rate in your area.
Notify Clients Ahead of Time
Once you’ve determined how much you’ll charge in late fees, give your clients a heads-up about the upcoming changes to your billing policy. You can do this by email, phone, or in person, but it’s essential that you have a discussion with each client and allow them to ask questions so they aren’t caught off guard the next time they receive an invoice. Before signing a contract, always discuss your late fee policy with new clients.
Add Your Late Policy to Your Invoice Payment Terms
Add the details of your late fee policy to your invoices in the payment terms section of the document. Make sure the section is easy to read and keep your terms simple and brief. For example, your payment terms could read:
“Thank you for your business. Payment is due within 30 days. Please be aware that we will charge 1.5% interest per month on late invoices.”
Include Your Late Fee Policy on New Contracts
It’s a good idea to write your late fee policy into all new contracts you sign with clients. Because a contract is legally binding, it’s important to clearly state your late fee terms within the contract. Including your late fee terms in your contracts also ensures clients know the policy before any work begins on a new project.
Ensure Due Dates Are Visible
Set yourself up for timely payments by making sure your invoices clearly convey all the information clients need to pay you on time. Your payment deadlines should be easy to see on your invoices. You can make them stand out by using a larger, bolder font or different font color.
Send Invoices Promptly
As soon as you complete a project, create an invoice and send it to the client along with the final work. Sending the invoice when the job is fresh increases the likelihood that your client will process the payment right away—meaning you’ll get paid faster.
After you’ve sent the invoice, set a reminder for the due date so you can follow up immediately if the invoice isn’t paid. If you use a cloud-based accounting solution, it can automatically notify you when invoices are past due.
Follow Up Immediately on Late Payments
If you haven’t been paid, follow up with the client on the payment due date. Write a brief, polite email that does the following:
- Reminds the client that payment is now due
- References the invoice number
- Outlines the amount owing
- Reminds the client of your late fee terms
- Has the original invoice attached for reference
Send a Revised Invoice
If your client fails to pay, you can start charging late fees. After 30 days, send a revised invoice that includes your late fees for the month. Include a note in your accompanying email acknowledging this is a second notice and that the payment is now 30 days overdue. Follow up with the client by phone or email until you’ve received or confirmed a payment plan.
Also Read: What Does Net 30 Mean
If Necessary, Escalate the Issue
If you’ve followed up diligently with the client and still haven’t secured payment for your services, you may decide to escalate the issue and explore other options. You can hire a lawyer to get legal advice and send a formal demand letter requesting payment. You can also look into collection agencies or take the client to small claims court.
How Much Can I Charge for Late Fees?
The amount you can charge for late fees depends on the state you live in because maximum interest rates are governed at the state level. You can check the usury laws in all states to confirm what percentage to charge for late fees.
Generally, though, if you charge less than 10% interest per year, you won’t have any legal issues with your late fee policies. A common approach to late fees among freelancers and service-based, small business owners is to charge 1.5% interest per month on unpaid invoices.
How To Calculate Late Fees on an Invoice
To calculate late fees on an invoice that’s 30 days overdue, take your monthly late fee rate, and multiply it by the total amount owing on the invoice. For example, if your late fee rate is 1.5% APR per month and your client’s invoice is for $3,000, you would calculate the late fees this way:
3,000 x 0.015 = 45
So, in this example, you would add $45 in late fees to the invoice total.
Get Paid On Time With Invoicing Software
As a freelancer, entrepreneur, or small business owner, you wear many hats in your day-to-day professional life. Invoicing is essential to get paid quickly and ensure steady cash flow—but when you’re left with an outstanding payment, it can put a damper on things.
That’s why invoicing software and invoice templates are so useful. Templates provide a clean, professional-looking invoice with all the information ready to be filled in. And when used with quality software, you can easily track payment due dates and late payments and even send payment reminder messages automatically.
Don’t let late payments get the best of you. FreshBooks lets you simplify the invoicing and late fee process, ensuring clients pay quickly and your business runs smoothly. Learn more about FreshBooks invoicing tools and give them a try for free.
FAQs on How To Charge Late Fees On Invoices
More questions? Here’s everything you need to know about late payment fees, payment reminders, and everything else to do with overdue invoices.
How do you charge interest and late fees on unpaid invoices?
The most important thing when creating your late payment policy is client communication. In addition to including the policy on your statement of work or contract, print it on your original invoice. Late payments can then be subject to interest or other late fees.
What is the highest late fee allowed by law?
The maximum monthly interest rate on past-due invoices varies by state. Typically, these maximums rest between 1% and 15% in monthly late fees, but they can be as high as 50% in certain states.
What’s the difference between a late fee and a penalty?
A late fee and an outstanding payment penalty are the same. When creating your own late payment policy, keep the language consistent about your invoice late fee. The wording is important in work agreements, so be as clear as possible.
Are late payment fees legal?
Late payment fees are legal and even required for many small business owners and freelancers. Provided your client agreed to your late payment charges and terms ahead of time, and provided you’re in accordance with all laws, you can charge a late fee on past due invoices.
Jason Ding, CPA
About the author
Jason Ding is a seasoned accountant with over 15 years of progressive experience in senior finance and accounting across multiple industries. Jason holds a BBA from Simon Fraser University and is a designated CPA. Jason’s firm, Notion CPA, is an accounting firm with a business-first focus. The firm specializes in preparing personal and corporate taxation while providing fractional CFO work and leading the accounting and finance function for several small-to-medium-sized businesses. In his free time, you’ll find Jason on the basketball court, travelling, and spending quality time with family.
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