This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.
Getting paid for waiting
When a client pays an invoice late, you lose the use of that money and may have to borrow to cover your own bills. Charging late payment interest compensates for that cost and encourages clients to pay on time. Most businesses calculate it as simple interest on the unpaid amount for each day past the due date.
The formula
Interest = invoice amount × annual rate × days late ÷ 365
- The annual rate is the one stated in your contract or invoice terms. A common US term is 1.5% per month, which is 18% a year as simple interest.
- Days late are counted from the day after the due date to the day of payment.
- A flat late fee can be added if your terms provide for one.
Worked example
An invoice of $5,000 is paid 45 days late, with a contractual rate of 18% a year:
- Interest: 5,000 × 0.18 × 45 ÷ 365 = $110.96.
- Interest per day: $2.47.
- Total now due: $5,110.96.
- Equivalent monthly rate: 1.5%.
Is it allowed?
In the United States, late charges are governed by state law:
- You can generally charge interest or a late fee on business invoices if the terms were agreed in advance, for example in a signed contract or on the quote the client accepted. Adding a late fee after the fact is much harder to enforce.
- Usury laws cap interest rates in many states, and some set specific limits on late fees for consumer accounts. Check your state’s rules before choosing a rate.
- Without an agreed rate, you may still be able to recover interest at the statutory or judgment rate set by your state, usually through a court claim.
In the European Union, the Late Payment Directive gives businesses a right to statutory interest of at least 8 percentage points above the European Central Bank’s reference rate, plus at least €40 in recovery costs per late invoice.
Good practice
- State your payment terms clearly on every quote and invoice: due date, interest rate and any late fee.
- Send a friendly reminder before the due date and another soon after it. Many late payments are simply forgotten.
- Keep a record of the due date, reminders and the date payment arrived.
- Be consistent: charging interest to some clients but not others can weaken your position if you need to enforce it.
- For large amounts or repeated delays, consider asking for a deposit or shorter payment terms.
Charging interest is not always worth the strain on a good client relationship, but having the right in your terms gives you leverage when you need it.