Late Fees On Invoices: How To Calculate & Charge Them | altLINE (2024)

Last Updated April 10, 2024

All too often, businesses struggle with slow-paying customers. When a client doesn’t submit payment by their invoice due date, it can create serious cash flow problems for your business.

If you find your business in this situation, you don’t want to waste too much time chasing down clients for payment. To prevent having to do so, many businesses add late fees on invoices to encourage their clients to submit payment on time.

Charging late fees can help limit potential cash flow issues. But you need to go about it the right way, because there might be circ*mstances where late fees don’t need to be applied in contracts. Let’s discuss further.

What Are Late Fees?

Before working out how to charge late fees on invoices, it’s important to understand how late fees are defined.

A late fee is an additional charge made to clients when they don’t submit on-time payment. In B2B transactions, late fees are typically applied on invoices, although they are also commonly enforced for taxes, credit card payments, mortgage payments, rent, and car loans.

Invoices must always list the payment due date (based on the payment terms) so the customer knows when they need to submit payment. If payment comes after the due date, the late fee—if there is one applied in the contract—is enforced.

For example, with net 30 payment terms, a customer will have 30 days from when the invoice was issued to pay their balance in full. If they fail to make their payment within 30 days, they could be charged a late fee.

How To Charge Late Fees On Invoices

Collecting unpaid invoices can be a major pain, so the way you go about charging and communicating late fees on invoices can make a big difference in ensuring timely payments and maintaining a healthy business partnership without adding tension.

Communicate Late Fees in the Initial Contract

Good communication is key to successfully charging late fees on invoices. You should set expectations when you first start working with a client by making them aware of your payment terms and late fee policy. Adding this information to your contract and invoice terms and conditions will help you avoid disputes later on.

Including a reminder of the late fee terms on your initial invoice can also be helpful. Even something as simple as a brief line that says, “You will be charged a 1.5% late fee for overdue payments,” can help ensure prompt payment. Use an invoice due date calculator to ensure that you list the correct due date on the invoice to avoid any miscommunication.

After a client’s payment becomes past due, you will need to send follow-up communication informing them of their new payment terms. This should include a copy of the original invoice, as well as an updated invoice showing the newly added late fees.

How To Calculate Late Fees On Invoices

Let’s say you find yourself needing to send an updated invoice that includes a late fee for your client because they didn’t pay on time.

When charging a monthly late fee, you’ll need to do a little math to calculate the new total for your invoice. Fortunately, this is relatively simple:

(Original payment amount) x (Late fee percentage) = total late fee

So, if your client has a late invoice worth $2,000 and your late fee is 1.5%, the math would look like this:

($2,000) x (.015) = $30

Then, you’d add that $30 to the invoice for a new total amount owed of $2,030.

Most late fees are charged monthly. For this late payment fee example, if an invoice was two months overdue, you’d multiply your monthly late fee of $30 by two for a new late fee total of $60. If you’d rather not spend time calculating percentages and your products or services have a relatively small price range, you could set flat rate late fees instead — such as charging a $15 late fee for invoices of $500 or less, and a $30 fee for invoices of $500 or more.

What Is the Standard Late Fee for Invoices?

Once you’ve learned how to charge late fees on invoices, it’s then time to determine how much you’re going to charge your client for late payment.

For many consumer-facing products and services (like credit cards and utility payments), late fees are between $25 and $50 to ensure that they are legally “reasonable” for the everyday consumer.

However, for B2B services where you send an invoice to a client, late fees are often calculated as a percentage of the invoice. For freelancers and other businesses, the average late fee percentage is 1.5% monthly interest. While there can be some variation, this is the typical late fee for invoices in part to ensure that invoice late fees remain compliant with state usury laws, which are laws that vary by state that set limits on interest rates to prevent banks or other lenders from applying predatory rates or fees.

Relatively low late fees ensure that your fees are considered fair and not excessive. They still encourage clients to pay on time, without making it impossible to pay off if they are late.

How Much Can I Charge for Late Fees?

One of the main questions business owners are concerned with is, “How much can I charge for late fees?”

Each state has its own usury limits which limit the interest rates that a lender can charge for a loan and the late fees one can charge for unpaid invoices. Quite often, these limits are also used as a guideline for the maximum amount you could charge for late fees on a late invoice payment.

Usury limits for interest rates can be as low as 8% in states like Alabama, or as high as 50% for corporations in New Jersey. Usury limits for late fees can be as low as 5% in states like Florida, while some states like Alabama have no max late fee.

Because there is so much variation between states, the typical late fee for invoices tends to be low — between 1-2% of the invoice total, or a maximum of 10% annual interest.

Not only does this help ensure you are legally compliant for any state where you might do business, but manageable late fees will help you maintain strong relationships with your clients. Charging unreasonably high late fees could result in losing customers and never getting paid.

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Late Fee Wording On Invoices

The goal of including late fees on invoices is to encourage on-time payment. Because of this, all payment information related to the late fee should be clearly communicated on the invoice.

Generally speaking, details on late fees will be included at the bottom of the invoice. You can include the same basic text on every invoice, such as a variation of this invoice late fee wording:

“Invoice payment is due within 30 days of receipt. A monthly late fee of 1.5% of the total invoice amount will be charged on all overdue payments.”

Your invoice should also list the payment due date, total amount owed, and any additional payment instructions.

Late Fee Example: Net 30 Late Payment Penalty Wording

Once an invoice is overdue, you’ll need to send an email reminder and an updated invoice with late payment fees. Remember to maintain a professional tone. For example, if you need to apply a late fee for a Net 30 invoice, your email could read as follows:

“Dear [Client],

I hope you are well. I wanted to remind you that invoice #[XXXX] is now overdue. As per our late fee policy, a late fee of [X]% has been added to your total balance. For your convenience, I have attached both the original invoice and the updated invoice to this email.

Please let me know if you are having any trouble with the payment options so we can find another solution. Please respond to confirm that you have received this invoice and that you have submitted payment.

Thank you,
[Your name]”

If a customer doesn’t pay after receiving the initial late fee notification, you may need to send additional follow-up messages. Be sure to send updated invoices each time you need to increase the late fee total.

To help reduce the risk of late payments, it is also a good idea to send reminder emails when an unpaid invoice is approaching the due date. These emails should also be professional, direct, and friendly.

For example:

“Dear [Client],

I hope you are well. I just wanted to remind you that payment for invoice #[XXXX] is due in [X] days. As a reminder, this invoice is payable on a [Net 30] payment schedule. As per our late fee policy, you will be charged a [X]% late fee if you don’t submit payment by [date].

For your convenience, I’ve attached another copy of your invoice to this email. Thank you, and please let me know if you are having any trouble with our payment options.

Sincerely,
[Your name]”

Related: Email Templates To Use To Politely Ask For Payment Professionally

Considerations Before Applying Late Fees

It’s imperative to understand that applying late fees on invoices might not always be the ideal proactive measure to take to encourage prompt payment. It can vary on a customer-by-customer basis. According to Blake Rutledge, CFO at Kruze Consulting, business owners must gauge which clients require a stricter approach vs. which clients should be provided more leeway.

For instance, it’s probably not best practice to incur late fees immediately after an invoice becomes overdue for clients with whom you have a great working relationship with and who have always paid on-time. Penalizing them on their first-ever payment slip-up might lead to a disgruntled client.

In this instance, you should instead reach out to the client and give them an opportunity to pay without additional fees. Perhaps they just forgot to pay and had a lot on their plate, in which case they would likely greatly appreciate the flexibility.

“Routinely jabbing them with a little extra interest charge—is that the sort of relationship you want to have?” Rutledge said. “If you’re in a recurring relationship, you can instead say politely, ‘hey, I’m going to wait to ship your next order until we’ve received payment for the ones we’ve already shipped.'”

Regardless, transparency is always key. As long as both parties are on the same page with payment terms before the first shipment is released, there should be no issue.

How Invoice Factoring Can Help Avoid Late Fees

Figuring out how to charge late fees on invoices, how to calculate late fees on invoices, and how to track down clients with overdue invoices can be a hassle. But it’s often a crucial step to ensure that you get paid in a timely manner so that you have sufficient cash flow to keep your business running. However, setting for late payments that will affect your business isn’t the only option.

With invoice factoring, you will receive the cash you need to reduce invoice-related stress. When selling unpaid invoices to a factoring company, you’ll immediately receive a cash advance to help cover your business expenses (typically 80-90% of the total value of the invoice). The factoring company will then follow up on collecting the invoice payment from your customer. You’ll receive the rest of the value of the invoice once the invoice has been paid (minus a small factoring fee).

If you’re tired of trying to track down clients and manage late fees, invoice factoring can be a worthwhile alternative so that you can focus on delivering great work to your clients.