The Complete Guide to Invoice Late Fees and Interest
By Arshi Khan, Founder of Just4Marketing · Last reviewed October 2026
Charging interest on overdue invoices compensates you for waiting and encourages customers to pay on time. Most businesses charge a monthly percentage, a flat fee, or both. This guide shows how late interest is calculated day by day, how monthly and annual rates compare, and what to put in your payment terms.
Common late payment terms
| Terms | Annual rate | Interest on $5,000, 45 days late |
|---|---|---|
| 1% per month | 12% | $73.97 |
| 1.5% per month | 18% | $110.96 |
| 2% per month | 24% | $147.95 |
Getting paid on time
Make terms visible
Show the due date, late fee, and interest rate on every invoice, not just in the contract.
Send reminders before the due date
A friendly reminder a few days before payment is due prevents many late payments.
Offer an early-payment discount
A small discount for paying early can work better than penalties for paying late.
Frequently asked questions
How is late payment interest calculated?
Interest = invoice amount × annual rate × days overdue ÷ 365. A monthly rate is converted to annual by multiplying by 12. On a $5,000 invoice 45 days late at 1.5% a month (18% a year), interest is $110.96.
What late fee can I legally charge?
Limits depend on where you and your customer are. Many U.S. states cap interest rates, the UK's late payment law sets statutory interest at 8% above the Bank of England base rate plus fixed compensation, and other countries have their own rules. Check local law before setting a rate.
Do I need to include late fees in my terms?
Generally yes. Late fees are most enforceable when they're stated clearly in your contract or invoice terms before the work is done, including the rate, when it starts, and any grace period.
Is 1.5% per month the same as 18% a year?
As simple interest, yes. If unpaid interest is added to the balance each month and charged interest too, the effective annual rate is about 19.6%. This calculator uses simple interest, which is the common practice for invoices.