Common late fee structures
There are three main approaches to late fees. The right choice depends on your industry, invoice size, and client relationships.
Percentage-based (interest)
Charge a percentage of the unpaid balance, typically calculated monthly or annually. Common rates:
- 1-1.5% per month (12-18% annually) - Standard for B2B invoices
- 1% per month - Conservative, widely accepted
- 2% per month - Higher end, may face legal limits in some states
Example: $5,000 invoice at 1.5%/month, 30 days late = $75 fee
Flat fee
A fixed amount regardless of invoice size. Simpler to calculate and communicate.
- $25-50 - Common for smaller invoices
- $50-100 - For mid-sized invoices
- Percentage of invoice - e.g., 5% of invoice total as flat fee
Example: $25 flat fee on any invoice over 30 days late
Combination
Flat fee plus ongoing interest. The flat fee covers administrative costs, while interest compounds for extended delays.
Example: $25 flat fee + 1% per month ongoing
Legal limits on late fees (US)
Late fee regulations vary by state. Some states cap interest rates or require specific disclosures. This is general guidance. Consult a lawyer for your specific jurisdiction.
General principles
- Fees must be "reasonable": Courts can void fees deemed excessive or punitive
- Fees must be disclosed: Include late fee terms in your contract or on the invoice before work begins
- Usury laws apply: Most states limit the annual interest rate you can charge (typically 10-25%)
State-specific limits
| State | Max interest rate (B2B) | Notes |
|---|---|---|
| California | 10% annually | Constitutional limit unless contracted otherwise |
| New York | 16% annually | Criminal usury above 25% |
| Texas | 18% annually | Or 6% above fed discount rate |
| Florida | 18% annually | Higher rates require specific disclosures |
For B2B transactions, most states allow higher rates if explicitly agreed in a contract. Consumer transactions face stricter limits.
Source: State usury statutes. Always verify current laws for your state.
Best practices for late fee policies
The goal is to get paid on time, not to punish clients. A well-designed late fee policy achieves this without damaging relationships.
Prevention is better than enforcement
- Clear payment terms upfront: Include due date, accepted methods, and late fee policy in every contract and invoice
- Send reminders before due date: A friendly reminder 3-5 days before prevents most late payments
- Make payment easy: Accept credit cards, bank transfers, and online payment. Every barrier delays payment
Enforcing late fees
- Apply fees consistently: If you waive fees for some clients, others will expect the same
- Document everything: Keep records of invoice dates, reminder emails, and fee calculations
- Communicate clearly: When applying a fee, reference the specific policy and calculation
Sample late fee clause
"Invoices are due within [14/30] days of the invoice date. Invoices not paid within [7] days of the due date will incur a late fee of [1.5%] per month on the outstanding balance, or [$25] minimum, whichever is greater."
When to waive fees
Consider waiving for first-time offenses from good clients, genuine hardship situations, or when you failed to send reminders. Building goodwill is sometimes worth more than the fee.
