Late Payment Charges, Fees & State Limits

What are late payment charges?

Late payment charges are financial penalties imposed on customers who fail to pay their invoices by the agreed-upon due date. These charges serve as both an incentive for timely payment and compensation for the inconvenience caused by delayed payments.

How late charge fees work

A late charge fee is a penalty amount you charge when a customer fails to pay by the invoice due date. Unlike interest fees that compound over time, these fees are added to the unpaid balance for each period payment remains overdue.

There are two main types of late payment charges:

• Flat fees: A flat dollar amount (typically $25 to $50) charged when payment becomes overdue. Unlike interest, late fees don’t compound but can be assessed repeatedly according to your payment terms.
• Percentage fees: Percentage fees are charged on the amount of the original invoice. For example, a 5% late fee on a $1,000 invoice would be a $50 late fee. These fees do not compound like interest charges, though; instead, if the invoice remains unpaid for another cycle, the percentage fee would be assessed on the original invoice amount and added to the overdue balance.

Both types of charges must be clearly outlined in your written agreements and comply with state regulations to be legally enforceable.

“From my experience … I’ve seen that combining both [types of] fees works best for encouraging timely payments,” said Andrew Lokenauth, a fractional chief financial officer who is also the founder of Fluent In Finance and TheFinanceNewsletter.com.

You can assess multiple late fees as long as these terms were established in your written agreement before the sale, appear on your invoices, and comply with state law. However, be mindful of state caps – if your state limits total penalties to 10% of the original invoice, interest fees might be more appropriate for larger balances.

State-by-state maximum invoice late fees and grace periods

Use this table to check allowable late payment charges by state. These represent general legal guidelines for business invoicing and may be subject to change.

Note: This content is for informational purposes only and may not reflect the latest legal requirements. Consult a legal advisor for compliance in your state.

How to calculate late fees: flat vs. percentage

Fixed amount approach 

You charge the same dollar amount each time a payment is late. For example, on a $200 invoice with a $25 monthly late fee:

• Month 1: $200 original invoice + $25 late fee = $225
• Month 2: $225 balance + $25 late fee = $250
• Month 3: $250 balance + $25 late fee = $275

Percentage approach

Some businesses calculate late fees as a percentage of the original invoice amount. Let’s say you have a 5% late fee policy and you invoice a client $1,000 with net 30 terms.

Month 1: The payment due date passes with no payment

• Late fee calculation: $1,000 × 5% = $50
• New balance: $1,000 + $50 = $1,050

Month 2: Customer still hasn’t paid

• Late fee calculation: $1,000 × 5% = $50 (still based on original invoice amount)
• New balance: $1,050 + $50 = $1,100

Month 3: Payment remains outstanding

• Late fee calculation: $1,000 × 5% = $50 (again, based on original $1,000)
• New balance: $1,100 + $50 = $1,150

Notice that with the percentage approach, the late fee remains $50 each month because it’s always calculated from the original $1,000 invoice amount, not the growing balance. This differs from interest charges, which would compound and grow larger each month.

Compliance and grace period guidelines

You should anticipate some customers questioning whether your interest or late fee charges are legal. Whether they are depends on whether you’re following the law.

“The legality of these fees is primarily governed by state laws, particularly those related to usury and contract law,” explained Ben Trigg, founder and CEO of Payello. “Usury laws set a limit on the interest rate that can be charged and contract law requires you to inform the customer about your fees.”

Before implementing any late fee or interest charge policy, ensure you complete these essential steps:

Legal requirements

•  Research your state’s maximum late fee limits (refer to the state-by-state table above)
•  Verify your state’s required grace period before fees can be applied
•  Ensure your fee structure complies with state usury laws
•  Confirm fees are reasonable and not punitive in nature
•  Review Fair Debt Collection Practices Act requirements if dealing with consumer debts

Contract and documentation

•  Include clear late fee terms in all written agreements and contracts
•  Specify fee amounts or percentages in your invoicing terms
•  State the grace period (if any) before fees are assessed
•  Define when and how frequently fees will be applied
•  Obtain customer acknowledgment of fee terms before service delivery

Invoice requirements

•  Display late fee policy clearly on all invoices
•  Include specific fee amounts or calculation methods
•  Show grace period information
•  Ensure terms are prominently visible and easy to understand

Grace period compliance

•  Implement systems to track invoice due dates accurately
•  Wait the required grace period before applying any fees
•  Document when grace periods begin and end for each invoice
•  Never apply fees before the legally required waiting period expires

Fee application standards

•  Apply fees consistently according to your stated terms
•  Calculate fees correctly based on your chosen method (fixed amount vs. percentage)
•  Maintain records of all fee assessments and calculations
•  Ensure total accumulated fees don’t exceed state-imposed caps

Customer communication

•  Send clear notices when payments become overdue
•  Explain fee calculations transparently
•  Avoid excessive or harassing collection communications
• Provide customers with copies of the original agreement terms upon request

Alternatives to charging late fees

There are other ways to collect on your unpaid invoices besides charging interest and late fees. You may want to consider the alternative options below.

• Communicating with your customer: Contact the customer to see what’s holding up their payment. “Missed payments aren’t always on purpose,” Trigg pointed out. It could be something fixed easily and reaching out shows empathy while still getting the message across that you expect to be paid. You can use this opportunity to gently remind the client that nonpayment will incur interest or fees.
• Providing payment incentives: Wave a carrot instead of a stick by offering a discount for full payment upfront or within 30 days. Sometimes, incentives to pay early or on time can be more effective than threats of fees and interest charges. Bird revealed, “Our data across millions of invoices paid since 2022 shows that a prompt payment discount, such as 2 percent if paid within 10 days, is the most effective way of getting cash into the bank well ahead of your due date.”
• Collecting payment upfront: Asking customers to pay upfront eliminates any potential nonpayment issues. You can also require a deposit instead of asking for full payment. “This changed my business completely,” Lokenauth told us. It’s up to you to decide if an upfront payment or deposit is more appropriate for your company, but business.com’s guide to requiring a deposit and upfront payments can help.
• Offering payment plans: Consider offering a payment plan if the client is having financial difficulties. You’ll show empathy while collecting at least some of what is owed. Payment plans usually include an interest charge, although you don’t have to add one. You can also provide a payment plan regardless of any financial hardship; even customers with the means to pay in full may prefer the option to pay in installments.
• Selling outstanding invoices: If you don’t think interest or late fees will prompt customers to pay their overdue balances and you can’t keep waiting to get paid, you might want to opt for invoice factoring. A lender will purchase your outstanding accounts receivable and give your business funds in exchange. Bird recommended this option especially if you need to “improve your cash flow.” Several highly rated business loan providers facilitate invoice factoring and a similar option known as invoice financing.

Late fee charges are viable collection tactics that speed up the debt collection process and compensate you for the costs of interrupted cash flow and additional collection activity. As long as you do it correctly and don’t alienate customers or get in trouble with the law, you might find it preferable to the alternatives above.

“But most important of all,” Bird said, “is to set up a strong receivables process from the get-go, with … payment reminders before invoices become overdue in the first place.”

Best practices for late fee policies

The key to charging interest or a late fee is to do it legally and without losing sight of your goals. Collecting the original invoice amount and maintaining a good relationship with the customer should always be your primary objectives. The experts we spoke with recommend following the best practices below.

1. You must have a written agreement to assess interest fees or late fees: Although these fees are standard practice in many industries, you should let your client know your intention in advance. Ensure the original contract the client signed states any fees that will be assessed, when they will be assessed, whether they compound and if there is a grace period. “This saves headaches,” said Lokenauth, who admitted he “learned this one the hard way.”
2. Don’t charge more than 10 percent interest per year or excessive late fees: You can charge interest on unpaid invoices if you stay within the bounds of the law. Some states restrict the amount you can charge in late fees, but you’re likely safe if you cap rates at 10 percent. “Make sure your late fee amounts are reasonable and proportional to the debt,” advised Lokenauth.
3. Don’t call interest or late fees a penalty: Do not describe the interest or late fee as a “penalty.” This could imply that you are attempting to punish the client instead of covering the additional costs involved in collecting the money you’re owed. If you have to go to court, this could hurt you.
4. Offer a grace period: A grace period is a time after the invoice is due in which you don’t charge interest or fees as long as payment is made in that window. For example, if an invoice is due on the first of the month, the grace period may be an additional 10 days. That way, you avoid alienating your client if payment is a few days late. “I’ve found this builds goodwill,” Lokenauth said.
5. Immediately alert clients when their payments are past due: “Consider a tiered approach before charging fees — gentle reminders first with a projected fee, then formal notices with fees,” recommended Denym Bird, co-founder of Paidnice. Both Bird and Lokenauth stressed the need to be “consistent” in enforcing fees. 
6. Take advantage of modern payment technology: Bird said business owners should use invoicing automation tools “to calculate and apply fees accurately.” But it’s not about streamlining processes just for yourself; you should for your clients as well. “Make it easy for customers to pay by providing multiple payment options,” said Bird.