What You Can Actually Charge on a Late Invoice

The uncomfortable thing I learned about late fees

For about two years I put "late fee: 1.5% per month" at the bottom of every invoice I sent, and for about two years I never once collected it. I assumed the line did the work. It does not. The line on the invoice is not what creates the right to charge. What creates it is the agreement you made before the work started, and an invoice arrives after that, which is exactly too late.

That is the American position, and it surprises people. In the United States there is no automatic right to charge interest on a late invoice. Interest on a commercial debt is a contract term. If your quote, your engagement letter or your terms of service said late payments carry a fee, you can charge it. If the first time you mentioned it was on the invoice, or worse in an annoyed email three weeks later, you are asking for a favour rather than enforcing a term.

The United Kingdom works the opposite way, and this is the part worth knowing if you invoice British businesses. There, statutory interest applies whether or not anyone agreed to it, and you can add a fixed sum on top for the cost of chasing. Same invoice, same delay, completely different legal footing. I have written this piece because I kept explaining the difference to people one at a time.

The UK position: interest applies whether you asked for it or not

Under the late payment legislation, a business to business debt in the UK earns statutory interest at the Bank of England base rate plus eight percentage points. That is the whole formula. If the base rate is 4%, your late invoice accrues at 12% a year, and it does so because the law says it does, not because your terms said it.

On top of the interest you can also claim a fixed sum for the cost of recovering the debt. The bands are set out in the legislation and they are not generous, but they are automatic. A debt up to £999.99 carries £40. A debt from £1,000 to £9,999.99 carries £70. A debt of £10,000 or more carries £100. That is per invoice, not per chase, and you can claim reasonable additional recovery costs beyond it if you actually incur them.

There is also a default on the payment terms themselves. If you never agreed a payment date, the clock is not open ended. GOV.UK puts the usual limit at 30 days for public authorities and 60 days for business transactions. Someone who tells you their standard terms are ninety days, having never agreed that with you, is describing their preference rather than your obligation.

One practical note. The base rate moves, so the rate you apply is not a permanent number you can hardcode into a template. That is why the late payment interest calculator leaves the base rate as a field you fill in rather than burying a figure that will quietly go stale.

The US position: you can only charge what you agreed

In the US the common term is one to one and a half percent a month, which is twelve to eighteen percent a year. Whether you can enforce it comes down to two things: whether the customer agreed to it before the work, and whether your state's usury cap allows that rate on that kind of debt.

Usury caps vary a great deal by state and by whether the debt is consumer or commercial, and business to business debts are often treated more permissively than consumer ones. I am not going to list fifty numbers here that will be wrong within a year. The honest summary is that 1.5% a month is commonly used and commonly enforceable between businesses, that consumer debts are more tightly regulated, and that if you are about to chase a genuinely large amount it is worth twenty minutes with a lawyer in that state rather than twenty minutes on a forum.

What matters more than the exact ceiling is the sequence. Put the late fee in the quote. Repeat it in the contract. Then repeat it on the invoice. By the time you are actually charging it, the customer has seen the term three times and cannot reasonably claim surprise. The quote generator and the invoice generator both carry a notes field for exactly this, and using the same wording in both is the least glamorous and most effective thing you can do about late payment.

A worked example, both jurisdictions

Take a $5,000 invoice, due on 1 April, still unpaid on 1 July. That is 91 days late.

Under a US contract term of 1.5% a month, the annual rate is 18%. The daily accrual is $5,000 multiplied by 0.18 divided by 365, which is $2.47 a day. Over 91 days that is $224.38. The total owed becomes $5,224.38.

Take the same invoice in the UK at £5,000, with a base rate of 4%. Statutory interest runs at 12%. The daily accrual is £5,000 multiplied by 0.12 divided by 365, which is £1.64 a day. Over 91 days that is £149.59. Then add the fixed compensation, which at this debt size is £70, giving £219.59 in total charges and £5,219.59 owed.

The two land in a similar place, which is a coincidence of the numbers I picked rather than a rule. The real difference is that the American figure only exists if the term was agreed, while the British figure exists regardless. You can run your own version in the late payment interest calculator, which has both modes and shows the daily figure separately.

Why I now quote the daily figure and not the total

This is the one tactical thing in this article that changed my collection rate, and it costs nothing. When you chase, do not lead with the total. Lead with what the delay is costing per day.

"You owe $5,224" reads as a static fact that can be dealt with next month. "This invoice is accruing $2.47 a day and has been for 91 days" reads as a leak. The first invites deferral. The second makes waiting visibly expensive, and the person reading it is usually not the person who benefits from the delay, so you are handing them an argument to take to whoever does.

I also stopped writing angry chasers. An email that states the invoice number, the original due date, the days elapsed, the daily accrual and the current total, with no adjectives, gets paid more often than one that expresses how it made me feel. The unemotional version is harder to argue with and easier to forward internally, and forwarding it internally is usually what actually gets it paid.

The paperwork that prevents the problem

Most late payments I have dealt with were not refusals. They were disputes about what was owed, dressed up as delay, and nearly all of them traced back to missing paperwork rather than bad faith.

A purchase order is the single biggest one. If your customer is a company of any size, an invoice without a matching PO number frequently does not enter the payment run at all. It is not rejected, it simply sits in an inbox while everyone assumes someone else is handling it. Asking for the PO number before you start, and putting it on the invoice, removes an entire category of delay. The purchase order generator exists for the case where the customer wants one but has no system to raise it.

The second is the credit note. When a customer disputes part of an invoice, the instinct is to reissue the whole thing with a lower number. That breaks their records, because the original invoice is already in their system, and it resets the payment clock. Issuing a credit note against the original leaves the audit trail intact and keeps the undisputed portion payable now rather than in another thirty days.

The third is simply having agreed a date. "Net 30" means nothing if nobody wrote it down. A payment date in the quote, carried onto the invoice, is what makes an invoice late rather than merely outstanding.

When to stop charging interest and start doing something else

Interest is a deterrent, not a collection method. It works on customers who intend to pay and are being slow. It does nothing to a customer who has decided not to pay, and it does nothing at all to one who has run out of money.

My own rule is that if an invoice passes ninety days with no payment plan agreed and no substantive response, the interest has already done whatever work it was going to do. At that point the options are a formal letter before action, a small claims filing, or selling the debt, and each of those is a decision about time rather than about money. Chasing a small invoice for six months costs more in your own hours than the invoice was worth.

The other thing I do at ninety days is stop new work for that customer. Continuing to deliver while an invoice ages is how a manageable problem becomes an unmanageable one, and it also removes your only real leverage. If you know what your time is worth, which is what the freelance rate calculator is for, the arithmetic on whether to keep going is usually not close.