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Being a service business owner comes with many challenges, some of which can potentially risk your company’s success. And one of the biggest setbacks an owner can face is an overdue invoice. One way to overcome this problem is to charge an additional fee for late payments.
If you’re wondering when it’s appropriate to apply late fees and how much to charge, you’re not alone. With Housecall Pro, we make this process easy, providing the resources needed to ensure your late fee application aligns with regulatory and industry standards.
Formulating a strategy to address overdue payments is essential to minimizing the harmful impact it can have on your business cash flow, and how you approach it will depend on your business needs. Here’s everything you need to know when crunching the numbers for late fee assessment.
What is a Late Fee?
A late fee is an additional charge applied to an invoice when the service goes unpaid within 1-30 days (or more) after the due date. Depending on the terms and conditions of your company’s invoice payment policy and local state laws, late fees can be applied as a general flat-rate fee or a fee that increases over time.
For example, a flat-rate fee policy might state an additional $20 will be applied after 30 days of non-payment, or a tiered fee policy could charge $5 after seven days, $10 after 14 days, and so on up to the state’s maximum limit.
What Are Interest Fees?
Interest fees use a formula with a percentage of the total unpaid balance to determine the rate applied. There are two types of interest fees, standard interest and compounding interest.
Simple interest is calculated based on a percentage of the original invoice amount, also known as the principal. Compounding interest is calculated based on a percentage of the principal amount plus the accumulated interest. The longer the invoice goes unpaid, the compounding interest is applied to the higher balance according to the payment terms. More on how to calculate these formulas in just a bit.
How Long to Allow Customers to Pay an Invoice?
Defining invoice payment terms that align with your business needs is key to managing your cash flow and keeping things running smoothly. Without a payment due date, there is no recourse if a client chooses not to pay on time.
Net 30 means payment is due 30 days from the invoice date and is the most widely used payment term. Net 60, net 90, and so on, are commonly used when billing for commercial services. This allows companies with a larger overhead to manage their cash flow before paying invoices.
However, if your clientele is mainly residential clients, you’ll need to prioritize your cash flow when determining the payment terms and conditions. Shorter terms include net 7, net 15, Payment in Advance (PIA), and 50 Upfront.
Is it Legal to Charge a Late Fee or Interest Fee?
It’s perfectly legal to charge a late fee or interest fee on an unpaid invoice as long as the late fee policy is clearly stated in your payment terms and conditions. Always comply with your state’s regulatory maximum fee limitations, including any required grace period. Keep reading to see where your business stands in our state-by-state comparison.
How to Calculate Invoice Late Fees
Calculating your invoice late fee can vary depending on the type of fee you plan to employ. Here are a few options to consider for your late fee strategy.
Flat-rate fees are a simple way to address unpaid invoices. The fee amount should be the same each time. You can apply multiple fees to the invoice if the balance goes unpaid for the timeframes outlined in the payment terms. Invoice late fees average between $25-$50 per month.
Flat-rate fees can also scale based on the invoice total. For example, $15 applied to overdue invoices under $200, $25 applied to invoices from $200-$500, and $50 for invoices over $500.
Simple interest fees are another way to charge for overdue payments. An interest fee is based on a percentage of the total invoice and then applied according to the payment terms. Small businesses typically cap out their late interest fees at 10 percent annually, or 0.83 percent each month of nonpayment. Here’s an example of a simple interest formula applied to a $250 invoice with a net 30 term at 10 percent interest:
$250 x 0.0083 = $2.075 interest fee
$250 + $2.08 = $252.08 due after 30 days of nonpayment
If the invoice goes unpaid after 60 days, the original interest fee calculated above is added to the total.
$252.08 + $2.08 = $254.16 due after 60 days of nonpayment
Each month or assessment period the invoice goes unpaid, a fee of $2.08 would be applied to the new total.
Compounding interest fees are calculated based on the current unpaid balance, including any accrued interest. Here’s an example of the compounding interest formula applied to a $250 invoice with a net 30 term at 10 percent interest:
$250 x 0.0083 = $2.075 interest fee
$250 + $2.08 = $252.08 due after 30 days of nonpayment
If the invoice goes unpaid after 60 days, the interest fee is calculated based on the new invoice total.
$252.08 x 0.0083 = $2.092 interest fee
$252.08 + $2.09 = $254.17 due after 60 days of nonpayment
Each month or assessment period the invoice goes unpaid, a new interest fee is calculated based on the current balance. Check out the Bureau of the Fiscal Service’s monthly compounding interest calculator if you need help crunching the numbers.
Hybrid fees are a combination of flat-rate fees with an interest fee assessed over time. For example, an overdue invoice could result in a $20 late fee payment + 1 percent interest for every 15 days of nonpayment thereafter.
Maximum Late Fee Limitations by State
Curious about what stipulations your state has regarding rates for fees due to nonpayment? We’ve compiled the data according to worldpopulationreview.com.
Disclaimer: This information is not intended to provide legal advice. Always research your state’s regulatory limitations and consult with your business attorney or accounting firm for more information.
| State | Usury Interest Rate | With Written Contract |
|---|---|---|
| Alabama | 6% | 8% |
| Alaska | Capped at 10% or 5 pts above Fed rate; 10.5% if $25K+ | |
| Arizona | 10% | No limit |
| Arkansas | Capped at 17% under Arkansas Constitution (Amendment 89) | |
| California | 10% max for personal, family, or household purposes | |
| Colorado | 8% | 45% |
| Connecticut | 12% | |
| Delaware | Max Fed discount rate +5%; no cap for debts over $100K | |
| Florida | 18% for debts under $500K; 25% max for debts over $500K | |
| Georgia | 7% max with no written contract; 16% max on debts of $3K or less | No limit if over $250K |
| Hawaii | 10% standard; 12% consumer; 10% on civil judgments | |
| Idaho | 12%; 5% + base rate on judgements recovered | No limit |
| Illinois | 5% | 9% |
| Indiana | 8%; 25% maximum on consumer loans | |
| Iowa | 5% | 2 pts above avg 10-yr U.S. Treasury note & bond rate |
| Kansas | 10% | Bills, bonds, promissory notes and contracts max at 15% |
| Kentucky | 8% | 4% over 90-day commercial paper rate (max 19%); no cap $15K+ |
| Louisiana | 12% | |
| Maine | 6% | |
| Maryland | 6% | 8% |
| Massachusetts | 6% | 20% |
| Michigan | 5% | 7% |
| Minnesota | 6% | 8% |
| Mississippi | 8% | Max 10% or 5% over 90-day commercial paper rate |
| Missouri | 10% maximum, unless the “market rate” is higher | |
| Montana | 10% | 15% or 6 pts above the Federal Reserve prime rate |
| Nebraska | 16% | |
| Nevada | Cannot exceed the prime rate at the largest bank in Nevada | |
| New Hampshire | 10% | |
| New Jersey | 6% | 15% |
| New Mexico | 15% | No limit |
| New York | 6% per year unless otherwise prescribed by NY CLS Banking (16% max) | |
| North Carolina | 8% | |
| North Dakota | 6% | 5.5% higher than cost of money but no less than 7% |
| Ohio | 8% base; higher caps for $100K+, mortgages, business, lenders | 8% |
| Oklahoma | 6% | Any rate permitted by the state law |
| Oregon | 9% | |
| Pennsylvania | 6% for loans of $50K or less | |
| Rhode Island | 21%, or the alternate rate of 9% points plus the domestic rate | |
| South Carolina | 8.75% | |
| South Dakota | 12% | No limit |
| Tennessee | 10% | No limit |
| Texas | 10% | No limit |
| Utah | 10% | No limit |
| Vermont | 12% | |
| Virginia | 6% | 12% |
| Washington | 12%, or 4 pts over the 26-week Treasury bill rate | |
| Washington, D.C. | 6% | 8% |
| West Virginia | 6% | 8% |
| Wisconsin | 5% | |
| Wyoming | 7% | No limit |
How to Charge Late Fees on Invoices
Now that you’re familiar with the different types of fees and the state limitations, you can determine how to charge for overdue invoices. When charging late fees, remember to do the following:
- Weigh the pros and cons of charging flat-rate, interest-based, or hybrid late fees.
- Establish your payment terms, including timeframes, grace periods, etc.
- Update your payment policy terms and conditions.
- Notify your customers of any changes to your policies.
How to Create a Late Fee Policy
Be mindful of how you articulate your late fee policy. Clear and concise language minimizes confusion and helps ensure your clients pay on time. Here are a few things to consider when creating a late fee policy.
- Know your terms and timelines. Identify your net terms, grace periods, and your method of late fee calculation.
- Document the specifics. Notate all facets of your payment policy, including the net terms, grace periods, interest or fee amount, and any fee assessment periods. Review other late fee policies and draft something similar. See the late fee policy templates below to copy and paste.
- Fine-tune the details. Because language in a late fee policy can be tricky, it doesn’t hurt to have your business attorney read it over for legal reasons. Your policy should appear on any service contracts and invoices, as well as your company website.
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Invoice Late Fee Policy Template Examples
Need a few examples to get you started? We’ve got you covered! Feel free to copy and paste these examples, fill in the blanks, and see what iteration best fits your company’s payment terms and conditions.
“Per the terms and conditions of our service, invoice payment is due within [net days] of receipt. Failure to pay within the aforementioned timeframe will result in a late fee of [fee amount] per month.”
“Invoice payment is due within [net days] of receipt. Please be advised that a [interest %] interest fee will be charged for every month of nonpayment.”
“Please be advised that payment is due within [net days] of the invoice date. We allow an additional [net days] grace period before a [fee amount] late fee is assessed for nonpayment. If the invoice is not paid within [net days], an additional [interest %] monthly interest fee will be added.”
Like what you see? Check out our cancellation policy and price increase letter templates for more.
Updating your Payment Terms and Conditions
While you’re updating the late fee policy, it’s also a good time to evaluate your payment terms and conditions. Your payment terms and conditions should be included in all estimates, service contracts, and your company website. Incorporate the following, if applicable:
- Acceptable payment methods
- Deposits and advance payment
- Discounts for early payment
- Financing options
How to Inform Customers About Your Late Payment Policy
Communication is key to ensuring payments are received on time. In addition to updating your company website and service contracts, send an email blast to your client database or include the information in a monthly newsletter. It also helps to mention your late fee policy when discussing quotes with prospective clients so they’re aware and not surprised later on down the line.
What to Do When Late Invoice Fees Don’t Work
While most people respond to late fees by paying their overdue invoices, you may encounter clients who still refuse to pay. But don’t let that discourage you. Housecall Pro’s invoicing software makes it easy to send invoices and payment reminders on one streamlined platform. But invoicing isn’t the only service included. We offer payment processing, payroll solutions, marketing campaigns, customer management, you name it! Sign up today to start your 14-day free trial of Housecall Pro’s industry-leading service management software solution.
