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.
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:
- A pre-determined flat rate (e.g. $5 for every week the invoice is past due)
- 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.)
|Alabama||6% maximum for verbal agreements, 8% for written agreements.||§ 8-8-1|
|Alaska||Cannot exceed 10% or 5 percentage points above Federal Reserve interest rate; 10.5% if debt is more than $25,000.||§ 45.45.010|
|Arizona||10% unless agreed upon in a written contract.||§ 44-1201|
|Arkansas||May not exceed the applicable rate of interest (17%) set forth in Section 3 of the Arkansas Constitution, Amendment 89.||§ 4-57-104|
|California||7% for money, goods, or things in action; 10% for money, goods, or things in action for personal, family, or household purposes; or the greater of 10% or 5% + the prevailing rate established by the Federal Reserve Bank of San Francisco for any other use.||Article XV|
|Colorado||Maximum is 45% per year. If no written agreement exists, interest rate may not exceed 8%.||§ 5-12-103|
|Connecticut||Interest rate may not exceed 12%.||§ 37-4|
|Delaware||Maximum rate of interest is 5% over the Federal Reserve discount rate. No limitations on interest rates for debts exceeding $100,000.||§ 2301|
|Florida||18% unless debt exceeds $500,000, in which case the rate of interest can be 25% (in accordance with § 687.071(2))||§ 687.03|
|Georgia||Maximum interest rate is 7% if no written contract exists; 16% on debts of $3000 or less; and any rate of interest may be established by parties to a written contract for debts of $250,000 or more.||§ 7-4-2|
|Hawaii||10% without a written contract; 12% for consumer credit transactions; and 10% on judgments recovered in any civil suit.||§ 478-2, § 478-3, and § 478-4|
|Idaho||Maximum of 12% if no contract exists. 5% plus base rate on money due on judgments.||§ 28-22-104|
|Illinois||5% without a written contract, 9% maximum if agreed upon by parties to a written agreement.||815 ILCS 205/4 and 815 ILCS 205/1|
|Indiana||The interest rate may not exceed 8%. Consumer loans may be charged a maximum of 25%.||§ 24-4.6-1-102 and § 24-4.5-3-201|
|Iowa||5% with no written contract; for written agreements, 2 percentage points above the monthly average 10-year constant maturity interest rate of US government notes and bonds.||§ 535.2(1) and (3)(a)|
|Kansas||10% maximum if no other interest rate was agreed upon. Bonds, bills, promissory notes, or other written instruments may stipulate a maximum of 15%.||§ 16-201 and § 16-207|
|Kentucky||Legal rate of interest is 8%. If a written agreement exists, the rate may be increased to 4% in excess of the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank OR 19%, whichever is less, on debts of $15,000 or less. Any rate is permitted for loans in excess of $15,000.||§ 360.010|
|Louisiana||Maximum interest rate is 12% per year.||§ 9:3500(C)(1)|
|Maine||Without a written contract, maximum interest rate is 6%. Maximum rates for consumer credit sales are 30% for first $1,000, 21% between $1,000 and $2,800, 15% for more than $2,800, and 18% on all unpaid balances.||9-B § 432 and 9-A § 2-201|
|Maryland||Maximum is 6% unless a written agreement is established, in which case interest rate can be up to 8%.||§ 12-102 and § 12-103|
|Massachusetts||6% maximum interest rate with no written agreement. Charging more than 20% interest is considered criminal usury.||Ch. 107 § 3 and Ch. 271 § 49|
|Michigan||5% if no written agreement exists, 7% if an agreement is made between the parties in writing.||§ 438.31|
|Minnesota||Interest rate is 6%, unless a different rate is agreed upon in writing. Interset rate may not exceed 8%.||§ 334.01|
|Mississippi||Maximum interest rate is 8% per year. “Contract rate” may not exceed the greater of 10% or 5% above the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank.||§ 75-17-1|
|Missouri||Rate of interest may not exceed 10% if a written instrument exists, unless the “market rate” is higher.||§ 408.030|
|Montana||Interest rate is 10% per year. Parties may agree in writing to a maximum interest rate of 15% OR 6 percentage points above prime rate established by Federal Reserve System, whichever is greater.||§ 31-1-106 and § 31-1-107|
|Nebraska||Maximum interest rate is 16%.||§ 45-101.03|
|Nevada||Parties may agree in writing to any interest rate. Without a written agreement, the rate shall not exceed the prime rate at the largest bank in Nevada.||§ 99.040|
|New Hampshire||Maximum rate of interest is 10%||§ 336:1|
|New Jersey||Maximum rate of interest is 6% without a contract. Maximum rate of interest with a written contract is 16%.||§ 31:1-1|
|New Mexico||Rate of interest shall not exceed 15% without a written contract.||§ 56-8-3|
|New York||Interest rate is 6% per year unless a different rate is prescribed in NY CLS Banking, in which case legal interest rate is 16%.||Gen. Oblig. § 5-501 and Banking § 14-A|
|North Carolina||Legal rate of interest is 8%.||§ 24-1|
|North Dakota||Maximum interest rate is 6%. Maximum contract rate is 5.5% higher than current cost of money but no less than 7%.||§ 47-14-05 + 09|
|Ohio||Written contracts may not stipulate a rate of interest exceeding 8%.||§ 1343.01|
|Oklahoma||Parties may agree to any rate permitted by state law; otherwise, 6% is the maximum rate without a written contract.||§ 15-266|
|Oregon||Maximum interest rate is 9%.||§ 82.010(1) + (3)|
|Pennsylvania||Maximum interest rate is 6% for loans of $50,000 or less.||41 P.S. § 201|
|Rhode Island||Interest rate may not exceed the greater of 21% or the alternate rate of 9 percentage points plus the domestic prime rate.||§ 6-26-2|
|South Carolina||Legal rate of interest is 8.75%.||§ 34-31-20|
|South Dakota||12% where no contract exists; no interest rate limit if parties agree in writing.||§ 54-3-4 and § 54-3-16(3)|
|Tennessee||Unless the parties agree in writing, the maximum interest rate is 10%.||§ 47-14-103|
|Texas||Unless the parties agree in writing, the maximum interest rate is 10%.||§ 302.001(b)|
|Utah||Unless the parties agree in writing, the maximum interest rate is 10%.||§ 15-1-1|
|Vermont||Maximum rate of interest is 12%.||9 V.S.A. § 41a|
|Virginia||Legal rate of interest is 6%. If parties agree in writing, the interest rate may be a maximum of 12%.||§ 6.2-301 and § 6.2-303|
|Washington||Rate of interest may not exceed 12% OR 4 percentage points above the equivalent coupon yield of the average bill rate for 26-week treasury bills.||§ 19.52.020|
|West Virginia||Parties may agree to a maximum interest rate of 8%; otherwise, the legal interest rate is 6%.||§ 47-6-5|
|Wisconsin||Legal interest rate is 5%.||§ 138.04|
|Wyoming||Maximum interest rate is 7% if no agreement exists.||§ 40-14-106|
Maximum invoice late fees by country (top 50)
|USA||0%; however, most states implement a sales tax||N/A|
|Argentina||No maximum rate||N/A|
|Australia||48% from interested collected plus other fees||Consumer Credit Act in NSW and ACT|
|Belgium||No maximum rate||N/A|
|Brazil||6.5%||Banco Central Do Brasil|
|Bulgaria||No maximum rate||N/A|
|Canada||60%||§ 347 of the Criminal Code|
|Colombia||33%||Borradores de Economia|
|Dominican Republic||No maximum rate||Latin Lawyer|
|Finland||7 percentage points higher than the interest rate applied by the European Central Bank||Finland Interest Act (633/1982)|
|France||An annual rate higher than 1/3 the average percentage rate applied by credit institutions is usury||French Consumer Code Article L313-3|
|Germany||5 percentage points above the basic rate of interest (currently 3.62%)||Section 288(1) of German Civil Code|
|Greece||2 percentage points above the maximum contractual interest rate.||E-Justice|
|Hong Kong||60%||Hong Kong Legistlation Cap. 163, Section 24(1)|
|Hungary||No maximum rate||N/A|
|India||At such rate as the Court deems reasonable||India Code Usury Laws Repeal Act, 1855, Section 2|
|Ireland||187% to 287%||Consumer Credit Act|
|Israel||13% per year, 17% per year on arrear interest||Banking Regulation in Israel: Prudential Regulation versus Consumer Protection|
|Italy||25% plus 400 basis points (or exceed average market rate by 800 basis points)||Lexology|
|Jamaica||6%||Money Lending Act|
|Kenya||No maximum rate||N/A|
|Malaysia||12% for secured loan, 18% for an unsecured loan||Moneylenders’ Act 1951, Section 17A|
|Mexico||No maximum rate||N/A|
|Morocco||No maximum rate||N/A|
|Netherlands||No maximum, except on consumer credit loans||Practical Law|
|New Zealand||No maximum rate||Commerce Commission New Zealand|
|Nigeria||48%||Thomson-Reuters (Practical Law)|
|Norway||No maximum rate||N/A|
|Pakistan||Interest not permitted under Pakistani laws for domestic lending||Practical Law|
|Panama||No maximum rate||N/A|
|Peru||No maximum rate||N/A|
|Philippines||No maximum rate||N/A|
|Poland||4 times the pawn loan rate of the National Bank of Poland||Polish Civil Code Article 359(2¹)|
|Portugal||7% or 9% (depending on in rem guarantee)||Law and Practice Portugal, Section 4.3|
|Puerto Rico (USA)||6%||Financing USA|
|Russia||Cannot exceed more than twice the usual applicable rate||Civil Code Chapter 42, Section 1, Article 809(5)|
|Saudi Arabia||No maximum rate||N/A|
|Singapore||4% per month||Singapore Ministry of Law|
|South Africa||10%||National Credit Act, Chapter 5, Part C (105)|
|Spain||No maximum rate||N/A|
|Sri Lanka||20%, 18%, or 15%||Sri Lanka Money Lending Ordinance Section 4(2)|
|Sweden||No maximum rate||N/A|
|Switzerland||10% or 12%||Swiss Credit Consumer Act, Section 3|
|Thailand||15%||Thai Civil and Commercial Code Book 3, Chapter II, Section 654|
|Ukraine||No maximum rate||N/A|
|United Kingdom||No maximum for payday loans||Credit Unions Act 1979|
|Vietnam||20%||Vietnamese Civil Code, Chapter XVI, Section 4, Article 478(1) (Full PDF)|
|Zimbabwe||Not specifically defined||Moneylending and Rates of Interest Act, Chapter 14:14, Section 8|
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
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!
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.