How much interest should I charge on an overdue invoice?
Best practices for setting late fees when clients don’t pay on time.
It can be a delicate business to navigate a client relationship. On one hand, you want to provide excellent service and build a strong relationship. On the other hand, you want to get paid for your work and be treated fairly. The relationship can be strained by a number of factors, including an overdue invoice payment. The best way to avoid damaging a client relationship while still getting compensated fairly is to be explicit in your contract about late fees.
Specify your invoice fees in the contract.
Your client contract lays the groundwork for your working relationship. Here, you want to be explicit about invoice payment due dates, grace periods for overdue payments, and late fees. This way, you have a paper trail with your client and any interest charge shouldn’t come as a surprise.
There’s no standard interest rate charge, or “late fee,” for an overdue invoice; that's up to you as the vendor or business owner. Many vendors structure their late fees as a percentage of the total amount for every 30 days the invoice remains unpaid. For example, if you’re charging your client $1,000 for one month of work and your policy is to charge a 5% monthly late fee on overdue invoices, then for every 30 days the invoice remains unpaid you can charge your client an additional $50 per month.
Regardless of the rate you choose, a best business practice is to call your client a few days after their 30-day payment window. A reminder may be just the nudge they need to pay their invoice, without you having to charge a fee. This dialogue helps build strong working relationships of mutual trust. However, it's important to have the late fee in place as a last resort to secure your income.
Create sound contracts and invoices.
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