What is a Reasonable Interest Rate for Late Payment?

Freelancers and business owners, while running their business and managing all the work, often have to face another big challenge – invoices way past their due date.

One of the biggest questions is how to approach overdue payments. Whether their owners like it or not, cash flow and operations in businesses can suffer a great negative impact due to multiple late invoices.

You might be the kindest person in this world and wait for a long time, days or even months, but at one point you might start to wonder if it is time to charge your customer a late payment fee.

This is your sign to create a late payment policy, encourage prompt payments, and to learn how to deal with late payments. 

Late payment fee

If a client didn’t pay a bill by its agreed-upon due date, you can charge them an extra fine. That fine is called a late payment fee.

When charging a client, you must include payment expectations within the original contract (or sales agreement). Also, you need to list the due date and the late fee percentage.

Reasonable late payment fee

Once the business owners decide to charge their clients, they have an option to charge a flat rate or a monthly finance charge, typically a percentage of the overdue amount.

Businesses usually assess a 1% to 1.5% late fee.

If you’re trying to calculate the interest rate for a late fee, prior to it you need to decide on the annual interest rate. Divide that number by 12 and you’ll get your monthly rate.

Finally, multiply it by the amount due and you’ll get the monthly late fee charge. 

Is charging late payment fees legal?

Yes, it is. However, make sure that your original contract allows it, as you won’t be able to charge a late payment rate otherwise.

Dealing with late payments

Without being paid on time by your customers, you might not be able to run your business operations, pay your suppliers, etc. 

Luckily, there are many different options to encourage your clients to pay on time.

One of the options is charging a late fee, but you can also offer an extension or use a payment plan.

A payment plan is very useful, especially if you’re dealing with customers who are in financial trouble and have no resources to pay you. 

This kind of plan outlines a minimum amount of payment that customers can continue to make each month and that way avoids having a bill in collections.

Also, for customers who usually make regular payments every month, you can offer an extension to the next month.

Creating a

late payment policy

To make sure your business is protected from late payments and to always be prepared for those situations, create a late payment policy.

To do so, firstly send out an invoice with a late payment policy. 

The invoice should lay out the details of late charges upfront, but also the payment terms and the number of days in which the customer needs to make a payment.

Also, make sure you send an email invoice after the transaction and a follow-up email if the bill remains unpaid. This is a kind reminder to the customer to make their payment.

Finally, after sending one or two reminders, don’t hesitate to charge a late payment fee. Send a deadline and a warning.