Receiving a late payment for your work is preferable to receiving no payment, but if the gap between when you deliver a product or service and when the invoice is closed is too great too often, it can cause cash flow problems. Put more simply, if your customers regularly drag their heels when paying you back, you may not have sufficient cash in hand to run your day-to-day operations.
There are, of course, several strategies you can employ to help ensure that you are paid consistently and on time — but few are as successful as imposing late payment fees. There are also more tactful and understanding ways to impose these fees than others. Let’s explore this strategy in more detail, including how much you should charge and when charging late fees is actuall a bad idea.
What is a late payment fee?
A late payment fee refers to any additional expense applied to a customer’s account as a penalty for failing to reimburse a seller by an established payment deadline. In the context of an credit-based purchase, these fees will be part of the initial payment terms and applied only if the invoice is not closed out by the agreed upon payment due date.
Typically, these fees are assessed as a percentage of the initial invoice, but they can also be set as a flat rate.
How to charge late fees on invoices
If you choose to impose late fees as part of your payment terms, you’ll first want to:
- Clarify and comply with the regulatory guidelines for your area
- Survey competitors and the broader industry to determine what a reasonable but effective rate might look like.
Once you’ve determined the late fee percentage that you want to impose, you should:
- Clearly document it along with any other conditions or payment terms (e.g., Net 30).
- Ensure that these conditions are communicated to your customers long before they ever make a purchase.
- Highlight them on any contracts, sales agreements, order forms, or other pre-sales materials you might share with a potential buyer.
You’ll also want to outline these terms on any invoices — and dunning notices — as well, specifically citing the payment due date along with the associated late payment fee for the particular invoice.
See the below for an example of a late fee on an invoice:
When to (and when not to) charge late fees to customers
Just because you have late fees in place — and your customers are aware of them — doesn’t necessarily mean that imposing them is always a smart choice. A little grace can go a long way in business, particularly with a long-standing client. After all, there could be various legitimate reasons why your customers aren’t paying on time.
On the other hand, being too lax in enforcement can be equally problematic, undermining the goal of implementing these fees—prompt payment.
Good reasons to charge:
- Cash flow: If you’re considering potential deficits in your operating accounts, you have far less room to be flexible about getting paid on time.
- Chronic delinquency: Consistently imposing late fees is often a very effective method for influencing customer behavior, particularly for clients who are always behind.
- Operating costs: For each overdue invoice, you’ll need to dedicate additional time and resources to chasing those funds, and late fees can help offset these increased administrative expenses.
Bad reasons to charge:
- Invoice disputes: Often, customers won’t finalize payment if they are actively disputing an invoice. Penalizing that buyer for not paying before the issue is resolved is a surefire strategy to turn them into former customers.
- Ignorance: If you introduced your late fee policy only recently or have poorly informed potential customers about it, you should waive the additional charge.
- Anomalies: Mistakes happen. Overlooking a misstep for an established customer — particularly those with a long-standing history of on-time payments — can go a long way toward building increased loyalty.
- Outside factors: Penalizing customers for payment delays caused by extreme extenuating circumstances (e.g., blizzards, floods, fires) or other events outside their control is never a good idea.
How to calculate late fees on invoices
If you’ve established your late fees as a flat rate per invoice, you could add the fee to the existing amount due to determine the new balance. Should you choose to charge your late fees as a percentage, it’s equally straightforward to calculate using the formula:
Late Fee = Amount Due On Invoice x Late Fee Rate
How much can I charge for late payment of invoices?
It depends. In many locales, some form of interest rate regulation or usury law will limit the fee you can charge for late payments. A sound business sense will likely discourage you from imposing this maximum allowed rate, particularly since potential customers might view it as excessive.
Instead, you typically want to determine an appropriate rate to cover your increased administrative costs, which is just steep enough to discourage delinquency. Again, it depends on your region, your industry, the health of the market, and how many competitors you have nearby.
Standard late fee for invoices
While there is yet to be a universal answer regarding an appropriate rate, in most cases and across most industries, a late fee rate between 1% and 2% is often considered the standard. How much you can legally exceed this standard will depend on your business’s location.
Maximum late fees by state
If you operate within the United States, please note the following guidelines:
State | Maximum late fee | Mandatory Grace Period |
| State | Maximum late fee | Mandatory Grace Period |
Alabama | None | 7 days |
| Montana | None | None |
Alaska | None | 7 days |
| Nebraska | None | None |
Arizona | None | 5 days |
| Nevada | 5% per month | None |
Arkansas | None | None |
| New Hampshire | 5% per month | None |
California | None | None |
| New Jersey | None | None |
Colorado | None | None |
| New Mexico | 10% per month | None |
Connecticut | None | 9 days |
| New York | $50 or 5% per month | 5 days |
Delaware | 5% per month | 5 days |
| North Carolina | $15 or 15% per month | None |
Florida | 5% of amount due | 15 days |
| North Dakota | None | None |
Georgia | None | None |
| Ohio | None | None |
Hawaii | 8% per month | None |
| Oklahoma | None | None |
Idaho | 5% of amount due | 10 days |
| Oregon | 5% per month | None |
Illinois | $20 or 20% (whichever is greater) | None |
| Pennsylvania | None | None |
Indiana | None | None |
| Rhode Island | None | None |
Iowa | $60 per month for balances <$700 | None |
| South Carolina | None | None |
Kansas | None | None |
| South Dakota | None | None |
Kentucky | None | None |
| Tennessee | $30 or 10% per month | 5 days |
Louisiana | None | None |
| Texas | None | 5 days |
Maine | 4% per month | 15 days |
| Utah | None | None |
Maryland | 5% per month | 15 days |
| Vermont | None | None |
Massachusetts | None | 30 days |
| Virginia | None | 5 days |
Michigan | None | None |
| Washington | None | None |
Minnesota | 8% per month | None |
| West Virginia | None | None |
Mississippi | None | None |
| Wisconsin | $20 or 20% per month | 5 days |
Missouri | None | None |
| Wyoming | None | None |
Late payment fee example
Consider the case of Antiphantomania Ltd., which provides chandelier maintenance services, catering predominately to large opera houses. Back in July, the firm completed the upgrade and reinforcement of a rather weighty chandelier in the Garner Palace Opera House and Dinner Theater. And on July 27th, the firm issued an invoice for the service.
The invoice identified a total amount due of $4,500 along with Net 30 payment terms, a 1.5% late fee rate, and a five-day grace period. As such, the invoice listed a payment due date of August 26, which passed without the Garner Palace rendering the appropriate funds.
The next day, Antiphantomania sent out a reminder notice that highlighted the amount due, the already-passed due date, and the late fee rate. And when the firm still hadn’t received payment as of the 31st — after the five-day grace period had passed — it assessed a late payment fee of $67.50.
Late Fee = $4,500 x 1.5% = $67.50
Antiphantomania subsequently created and sent out an updated invoice with an amount due of $4,567.50 (the original amount due plus the new fee). This invoice also indicated a new due date, clarifying that an additional late fee would be applied if the new due date was also missed. Fortunately, the Garner Palace closed out its invoice in the next week.
How to deal with late payments if late fees aren’t an option
Beyond late fees, there are quite a few strategies you can employ to help encourage prompt payment from your customers. Some common — and typically effective — strategies include:
- Early payment discounts: Incentivize buyers to close out their invoices promptly by offering a carrot to your late fee stick. These discounts typically offer a percentage decrease in the amount owed if the buyer receives payment within a handful of days after receiving the invoice.
- Automation: With automated invoicing workflows, you can eliminate unnecessary process delays and ensure your payment requests go out quickly and consistently. Ideally, whatever platform you choose will also include automatic dunning capabilities, helping to streamline communication with your debt-holding customers.
- Payment options: The more payment channels you accept, the easier it will be for your customers to give you their money. Consider implementing a payment portal to simplify the invoice-closing process further.
- Invoice factoring: Rather than managing your own dunning and collection efforts, you can outsource these tasks to an invoice factoring company. This third party will provide you with an up-front payment — typically 80-90% of the amount owed — and then pursue the full amount from the client.
- Cash on delivery: You can eliminate the threat of late payments by requiring your customers to pay upfront or before receiving your goods or services. Of course, you don’t need to require all of your customers to choose this payment option — instead, require this for new buyers only or customers with poor credit histories.
Note that these strategies for handling late payments are not mutually exclusive. You can combine them to find what works best for your business and customers.
How AR software can help get you paid on time and avoid late payments
Whether you’re imposing late payment fees, using one of the alternate strategies listed above, or taking a different approach altogether, the right accounts receivable (A/R) management software can make your life much easier. As previously mentioned, you’d be wise to choose a platform that can accelerate and simplify your invoicing processes through automation—one like our Accounts Receivable Automation software.
Invoiced’s A/R Software delivers integrated accounts receivable workflows to create, track, and verify invoices with limited human intervention. Our Smart Chasing feature lets you set up automated, multichannel touches to automatically follow up on outstanding payments, keeping your customers’ obligations at the forefront of their minds. Alongside these capabilities, our platform has an integrated self-service portal that lets buyers set up autopay, register disputes, update payment details, and finalize transactions—all from a single, intuitive console.
Do you want to implement late fees for some customers but not others? No problem. Our accounts receivable automation software allows you to customize invoices by customer and invoice, allowing your A/R specialists to set the terms and conditions they know will work best for each occasion and customer.
Get paid faster and make applying late fees easier with Invoiced
With so much convenience in a single platform, you’ll be able to cut out much of the waste in your current A/R operations while making life and payments easier for your customers. Request a demo today to fully explore what our Accounts Receivable Automation software can do.
For businesses with cross-border invoicing needs, check out what’s possible with Flywire, our parent company. Offering broad integration capabilities, Flywire software can fit seamlessly within your A/R workflows, helping you accelerate and optimize the payment experience for your staff and customers.
