Can I Charge Interest on Late Payments? (2024)

FAQs

Can I Charge Interest on Late Payments? ›

Because the government doesn't regulate a business' late payment fee, you can, in theory, charge whatever payment interest rate you see fit. However, small companies tend to charge a late transaction payment interest rate of 1.5%, while larger enterprises charge 2.5% and up.

Interest on late commercial payments

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.

You can charge interest and claim debt recovery costs if another business is late paying for your goods or services. The interest you can charge if another business is late paying for goods or services is called “statutory interest”.

Generally speaking, late fees on invoices should be capped at around 10% annually, with the interest broken down into a monthly charge. For example, if you're charging 10% interest on a $5,000 invoice, the annual interest rate would be $500, which means that the monthly interest would be $41.67.

The typical late payment fee for invoices is 1% to 2% of the past due payment amount per month. How do you remind a customer of a past-due invoice? You can politely remind a customer about an unpaid invoice with a payment reminder email that includes the invoice number and due.

According to the California Supreme Court, contractual obligations for payment of interest charges (even if over 10% per annum) on late payments is valid, legal and not subject to California's usury limitations.

If you want to charge late payment fees, you certainly can. However, these need to be clearly stated on the invoice so the customer is aware of them and encouraged to pay on time.

As a vendor, it's entirely legal for you to charge interest on unpaid invoices. However, the real question is whether your clients are legally obligated to pay it. A vendor should include these details in a contract or statement of work agreement before any work begins.

USURY LAW (LIMITATIONS ON INTEREST RATES CHARGED ON LOANS) The California Constitution prohibits loans that are made primarily for personal, family or household purposes from having interest rates above 10% per year. This is California's general usury law. However, there are many exceptions.

If a debtor is late with payment of a money obligation under a contract, the creditor is entitled to claim mora interest on the outstanding debt due to the debtor's failure to make payment on the due date. The creditor is entitled to claim this interest even without a specific contractual provision to pay interest.

Can I charge extra for overdue invoices? ›

The short answer is yes. Charging interest on overdue payments is legal for small businesses to do.

In Australia, you can charge a reasonable fixed penalty late fee or interest capped at around 10% annually (broken down to a monthly figure). It's best to start by keeping in mind that late fees are only there to encourage payment, not to generate any profit for your business.

Late fees usually range from 1% to 2% monthly interest rate, so staying near that range is the most reasonable approach.

Adding Late Payment Interest

You can add 8% interest above the bank base rate to an overdue invoice from the day after the invoice became overdue. Work out the interest on each invoice outstanding to you if multiple invoices are overdue.

In general, clients cannot refuse to pay late invoices if they have received goods or services as agreed upon in the contract or agreement. Late invoicing doesn't absolve them of their payment obligation.

Interest is levied at 1% per month or part of a month on the tax amount outstanding. The interest needs to be paid is simple interest.

The California Constitution prohibits loans that are made primarily for personal, family or household purposes from having interest rates above 10% per year. This is California's general usury law.

To calculate the interest due on a late payment, the amount of the debt should be multiplied by the number of days for which the payment is late, multiplied by daily late payment interest rate in operation on the date the payment became overdue.