How to calculate late fees on overdue invoices.
Tips for calculating interest charges for late payments.
It’s important to explicitly include late fees and rules in your contracts with clients. If you outline this from the outset, there will be no unwelcome surprises — and you’ll have an enforceable mechanism for payment. But then the question is, what’s reasonable to charge as far as late fees and interest on past-due invoices?
Is it acceptable to charge interest on past-due invoices?
It’s okay to charge interest on past-due invoices as long as there’s an agreement or contract in place that says you can. Late fees are standard across most industries but check with local laws about specific timelines. There’s no standard interest rate charge, or “late fee,” for an overdue invoice, and it may feel unclear how to charge interest on overdue invoices.
Read on to learn how to calculate interest on past-due invoices.
How to calculate interest on past-due invoices.
There’s no standard interest rate charge, or “late fee,” for an overdue invoice, though there are some established ways to calculate it.
The following are some ways you can calculate interest on overdue invoices:
- Flat fee. A set amount of money for each specified amount of time an invoice goes unpaid. Usually, this would be a flat fee every 30 days an invoice goes unpaid to make accounting easier for you. You could also do it daily, weekly, bimonthly, or at some other interval of your choosing.
- Percentage. A standard percentage of the total contract for each specified time an invoice goes unpaid. For example, if you set a 5% late fee every 30 days and you’ve contracted $5,000 of work, the fee would be $250 each month.
- Graduated. Increase your flat or percentage rate for every set amount of time the invoice goes unpaid. For instance, every 30 days, the payment could go up $5 or increase an additional 2%.
Considerations when calculating interest on overdue invoices.
- Relationship with your client. If you have an established working relationship, you might want to consider more leniency to maintain that relationship. If this is a new client, however, you might want to set higher rates to set expectations around on-time payments from the outset.
- Your business brand. Are you a no-nonsense, efficient business owner? Or more of an understanding, relationship-focused one? There are no wrong answers, but just remember that every decision and reaction represents your business, and late fees are no exception.
- How busy you are. If you’re swamped and have consistent income streams already, consider a simple late fee. If business is slow and you need to secure quick payments, you may want to consider charging for every week that an invoice goes unpaid.
Steps to take before charging interest on past-due invoices.
While it can be tempting to immediately charge a customer once their payment is late, offering other alternatives can actually make them send in their payment quicker.
- Contact the customer. Reach out and ask what’s delaying the customer’s payment. This shows empathy while reminding them that the deadline has passed. You can kindly remind them that fees will occur if the money is not sent in a timely manner.
- Offer a payment plan. If your customer is encountering financial difficulties, offering payment plan options can help you obtain the payment while showing empathy to someone interested in your business.
- Incentivize payments. Offering an incentive rather than a threat can sometimes be a more effective method of getting a payment.
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