Charging Invoice Late Fees: State Limits and Rules

Invoice late fees help incentivize clients to pay on time and help freelancers avoid having to chase down payments. A well-structured late fee policy can also strengthen a case if legal action becomes necessary. Here’s how to implement a bulletproof plan for late fees that can be built into all transactions.

Invoice late fees help incentivize clients to pay on time and help freelancers avoid having to chase down payments. A well-structured late fee policy can also strengthen a case if legal action becomes necessary. Here’s how to implement a bulletproof plan for late fees that can be built into all transactions.

What is an invoice late fee?

Late fees are additional charges applied to an invoice when it is not paid by the agreed-upon due date. For vendors and service providers, late fees can act as an insurance policy to help mitigate the consequences of unpaid invoices by:

• Making it more expensive for the client to not pay on time
• Compensating for the inconvenience of chasing after payments
• Making up for unplanned impacts on the business’s balance sheet

It may be prudent to offer clients a grace period or payment plan option before resorting to late fees. In any case, late fees should always be specified ahead of time. It’s important to have a written agreement in place to make the payment terms crystal clear, whether it’s in the form of a signed contract or contained in a simple email exchange.

How much should you charge for late fees? (Flat rate vs. percentage)

The way in which late fees are charged depends on the needs of the business and the nature of the particular client relationship. Invoice late fees are typically structured in one of two ways:

1. A pre-determined flat rate (e.g. $5 for every week the invoice is past due)
2. A percentage of the balance (e.g. 3% of the amount owed)

Each of these options comes with its own set of advantages and drawbacks. Flat rates are more straightforward and easier to calculate, but percentage-based fees are more common and more customized to the invoice in question. Other factors to consider include:

• Project size: Charging late fees as a percentage can be more effective in cases where the amount owed is significant, whereas a flat rate may be more suitable for smaller amounts.
• Industry standards: To get an idea of what is considered reasonable in your industry, find out what other professionals are charging. The average late fee charged by freelancers hovers around 1.5%.
• Client history: If a client has a history of paying on time, or if you have an important and long-standing relationship, a more forgiving late fee policy may be appropriate. On the flip side, you may want to enforce a stricter policy for clients who consistently pay late.

On average, freelancers charge 1.5% per month on late invoices. (1)

Keep in mind that there may be legal implications associated with charging late fees. If you’re applying late fees as a flat rate, it’s a good idea to calculate the percentage anyway to ensure you’re not running afoul of usury rate laws.

Is it legal to charge late fees?

As long as the terms are agreed upon ahead of time, imposing late fees is a legally sound and effective strategy for collecting payments from reluctant clients. But does the law limit how much you can charge?

The short answer is maybe. Most jurisdictions set limits on the amount of interest a lender can charge. Staying under these limits (known as usury rates) is wise.

The reason for this is twofold. While an unpaid invoice is usually legally distinct from a loan, courts have determined in some cases that contracts appearing to be sales agreements are actually disguised loan agreements. Beyond legal complications, though, late fees that exceed usury rates would likely be considered exorbitant.

Keep your clients and the courts happy by staying under the maximums below.

Maximum invoice late fees by state (U.S.)

Maximum invoice late fees by country (top 50)

How to add late fees to your invoice

Building late fees into your invoice is easy. The key is to have a clearly defined due date and send updated invoices each time new late fees accrue to the outstanding balance.

Step 1: Send Your Invoice

Before charging any late fees, make sure to send your client a timely, professional invoice in accordance with your agreed-upon payment terms. Specify a payment due date. You can also spell out additional terms and conditions in the “Invoice Notes” section.

Step 2: Follow Up

You may wish to give your client a second chance before the late fees hit. Go to your Invoices tab, open the outstanding invoice, and select Share Link to grab the URL or Download to get the PDF version. Share this with your client in your reminder email.

Past Due Invoice Follow-Up Template

Subject: Reminder – Your invoice for [PROJECT] is ready

Dear [CLIENT],

I’m writing to follow up on the invoice for [PROJECT]. As a reminder, payments are due by the 30th of each month with a 5-day grace period before late fees begin accruing.

The invoice is attached here for your convenience.

Thank you again for your business!

Best,

[YOUR NAME]

Step 3: Send Updated Invoice With Late Fees

When your best efforts at collecting your payment on time have failed, it’s time to put in writing the amount you’re owed with late fees included. You’ll need to create a copy of your invoice to add the late fees in.

First, go to your Invoices tab and select Duplicate Invoice. Add a new line item for late fees, adjust the due date, and update any other relevant details before sending.

Don’t forget to void the original invoice once your client has received the new one. Open the invoice and select Void from the menu.