How to charge late fees on unpaid invoices
Updated · 2 min read
Late payments hurt small businesses more than anyone. Late fees give clients a reason to pay on time, but only if you set them up correctly and use them with judgment.
Step 1: Put it in your terms before you start
A late fee is only fair (and usually only enforceable) if the client agreed to it upfront. Include it in your contract or quote, and print it on every invoice:
Invoices unpaid after the due date will incur interest at 1.5% per month (18% per year) until paid.
Step 2: Choose a type of late fee
| Type | Example | Notes |
|---|---|---|
| Interest | 1.5% per month on the overdue balance | Scales with the amount and how late it is |
| Flat fee | 25 per overdue invoice | Simple, but can be too small or too large |
| Both | Flat fee + monthly interest | Common in B2B contracts |
Step 3: Check the legal limits
- United States: many states cap the interest rate you can charge (usury laws). Check your state’s rules.
- United Kingdom: for business-to-business debts, the Late Payment of Commercial Debts (Interest) Act lets you claim statutory interest at 8% above the Bank of England base rate, plus fixed compensation of £40, £70 or £100 depending on the size of the debt.
- European Union: the Late Payment Directive sets statutory interest for B2B transactions at 8 percentage points above the European Central Bank reference rate, plus at least €40 compensation.
Rules differ for consumers, so check before charging late fees to individuals.
Step 4: Calculate the fee
Simple interest is the usual method:
Interest = amount × annual rate × days late ÷ 365
For 2,000 that is 30 days late at 18% a year: 2,000 × 0.18 × 30 ÷ 365 = 29.59. Our late payment interest calculator does this for you.
Step 5: Remind before you charge
Most late invoices are paid after a friendly nudge. A simple sequence:
- 3 days before due: a friendly heads-up.
- 1 day after due: “Just checking this reached you.”
- 7 days after: firmer, mentioning the late fee in your terms.
- 14–30 days after: send an updated invoice including the late fee.
Adding the fee to an invoice
Open the overdue invoice from your history, duplicate it, and add a line such as “Late payment interest, 30 days at 18% p.a.”. Or send a separate invoice that references the original number. Either way, keep the original invoice unchanged for your records.