Getting paid on time can be a headache for businesses, especially when chasing down slow-paying customers creates cash flow problems. To avoid these issues, many businesses charge late fees on invoices to encourage clients to pay on time.
So how do you calculate (or charge) these late fees? Let's break it down.
What are late fees on invoices?
In business-to-business (B2B) transactions, late fees serve as a way to encourage prompt payment and prevent disruptions in cash flow. These charges are a standard practice in business to ensure that payments are made in a timely manner, helping companies maintain their financial health.
Pricing can vary depending on the terms set forth in the original agreement between the parties involved. Businesses need to communicate their late fee policies clearly with clients to avoid any misunderstandings or disputes over payments.
In some cases, late fees may be waived if there are valid reasons for the delay in payment, but this is typically at the discretion of the company issuing the invoice.
Late fee wording on invoices
To ensure that clients are aware of late fees, it's important to provide clear and concise information on the invoice. The details about late fees should be displayed prominently, usually at the bottom of the document.
This information should include the payment due date, the total amount owed, and any specific terms and instructions concerning late fees.
Ideally, the terms of your late fees will be laid out in your contracts. Repeating this information on invoices is a simple reminder of what was agreed upon.
Clear policies regarding late payments should be put into place to protect the financial health of the business.
Including information about those late fees on invoices can help improve communication and transparency between the business and its clients.
How to calculate late payment fees on invoices
When calculating late payment fees on invoices, you'll need to determine the late fee percentage and apply it to the original payment amount.
The original payment amount is the total amount charged on the invoice, assuming it was paid on time.
The late fee percentage is generally applied as a percentage of the total.
For example, if a client has a late invoice worth $1,000 and the late fee is 1.5%, the late fee calculation would be as follows:
$1,000 x 0.015 = $15
The late fee of $15 would be added to the invoice for a new total amount owed of $1,015.
Payment terms
One thing that makes late fees seem more complicated is that businesses often use generally accepted "codes" to communicate payment terms, but these codes generally don't include the late fee terms.
Instead, it's a good practice to include late payment fee terms as a separate note at the bottom of the invoice.
For example, "net 30" means that the invoice needs to be paid within 30 days, but that doesn't let you know how much extra you'll owe if you're late.
Similarly, "2/10 net 30" means you'll get a 2% discount if you pay the invoice within 10 days. If you don't, the full amount is due in 30 days. But again, the late fee isn't mentioned.
Companies often include a simple sentence at the bottom of the invoice, usually as part of the invoice template, letting the customer know what the late fees will be if an invoice isn't paid on time.
What to do about late payments
If you included your late fee terms on an invoice and your customer didn't pay you on time, you may want to send them a new invoice that reflects the new amount they owe—including a separate line to charge late payment fees.
However, you might want to start with a simple note asking about any past due invoices. There's always a chance that the overdue payments were unintended.
If you have a long-standing, valued relationship with that client, offering a grace period and attempting to resolve the problem in a friendly way first may be the best approach.
You may also want to start sending payment reminders as unpaid invoices approach the deadline.
How instant payments can help avoid late fees
Integrating instant payment options into your payment system can benefit both your finance team and your clients. By offering convenient and efficient payment methods such as express payments, you can reduce the occurrence of late payments and the associated late fees.
Platforms like BILL provide organizations with the tools they need to streamline the payment process and ensure that payments are processed quickly and accurately, improving cash flow and overall financial stability.
Providing clients with instant payment options can also enhance customer satisfaction and loyalty, as they appreciate the convenience and ease of making secure payments.
“BILL has made getting payments from customers so much easier and faster. Customers love the easy payment link.”—Jordan Irvine, Director, PMO, Meltwater*
By giving customers a way to avoid late fees and pay at the last minute, companies can improve their internal financial management while building stronger customer relationships.
“BILL has provided value not only by making payments quick and easy for us and our clients but we have recently began to make use of the immediate payment loan option which has helped us immensely in managing cash flow.”—Britt Hogue, Principal, The Collective Good*
*Based on a March 2024 survey of 2,199 BILL network members.
Sign up with BILL to start offering instant payment options for your customers and clients.
Late fees on invoices FAQ
Here are quick, easy answers to some common questions about late fees and late fee policies.
Can you legally charge interest on overdue invoices?
Charging interest on overdue invoices may or may not be legal depending on the state you are in. Each state has usury limits that place a cap on a reasonable late payment fee, dictating the maximum amount of interest that can be charged on late payments.
It's important to be familiar with these limits and ensure that any late fees imposed are within the legal boundaries set by the state. Failure to comply with these regulations can result in legal consequences for the business.
If you want to charge late fees or a monthly interest rate on an overdue invoice, consult with a legal professional to ensure that your late payment policies are in line with state laws. Once you've verified your policy, remember to include it in the original contract and at the bottom of each invoice.
What is the standard late fee for invoices?
Late fees for invoices are commonly 1-2% of the total invoice amount or a maximum of 10% annual interest rate. That said, remember that different states will have different regulations regarding the late fees you can charge.
These fees serve as a way to incentivize prompt payment from customers and adhere to state usury laws.
It's important for businesses to clearly outline their late fee policies in their terms and conditions to ensure transparency and fairness in their payment processes. Implementing a clear late fee policy can help businesses avoid unnecessary disputes with customers and minimize the risk of unpaid invoices.
By understanding how to calculate and charge late fees on invoices, businesses can effectively manage payments and maintain healthy cash flow. Incorporating instant payment options and complying with legal guidelines can help businesses avoid late fees and foster strong client relationships.
