Can You Legally Charge Late Fees on an Unpaid Invoice?
Late payments hurt your cash flow. Here is what you need to know about charging late fees on invoices — including legal limits, best practices, and how to word the penalty.
The Short Answer
In most jurisdictions, yes — you can charge late fees on unpaid invoices, provided the terms are disclosed to the client before the work begins or at the time of invoicing. Late-payment penalties are a legitimate business tool used to encourage timely payment and compensate you for the cost of delayed cash flow.
However, the specifics — how much you can charge, when penalties kick in, and what disclosures are required — vary by country, state, and the nature of your contract.
How Late Fees Work
A late fee is an additional charge applied to an invoice balance that remains unpaid past the due date. The most common structures are:
- Percentage-based (monthly). A percentage of the outstanding balance charged each month the invoice remains overdue. Common rates range from 1 percent to 2 percent per month.
- Flat fee. A fixed dollar amount added once the invoice becomes overdue — for example, a $25 or $50 late fee.
- Daily interest. A small daily charge calculated on the outstanding amount. Less common but sometimes used in formal contracts.
Legal Considerations by Region
United States
There is no single federal law governing late fees on business invoices. Instead, rules vary by state. Most states allow "reasonable" late fees — typically 1 to 1.5 percent per month (12 to 18 percent annually). Some states have usury laws that cap the maximum interest rate you can charge. Always check your state's specific regulations.
European Union and United Kingdom
The EU Late Payment Directive entitles businesses to charge interest on overdue invoices automatically — typically at a rate of 8 percentage points above the European Central Bank reference rate. In the UK, the Late Payment of Commercial Debts Act provides similar protections, including the right to claim a fixed sum on top of interest.
Australia and Canada
Both countries allow late-payment charges provided they are disclosed in the contract or invoice terms. Rates must be reasonable and not punitive. Courts can strike down fees deemed excessive.
Best Practices for Charging Late Fees
- Include the policy in your contract. The strongest position is having late-payment terms agreed in writing before work begins. Include the exact rate, when it applies, and how it is calculated.
- State it on every invoice. Even if it is in the contract, print "A late fee of 1.5% per month applies to overdue balances" in your notes or terms section. Blank Invoice Maker has a dedicated notes field for this.
- Send a reminder before the due date. A friendly nudge 5 to 7 days before the deadline prevents most late payments entirely — which is better than collecting a fee.
- Apply fees consistently. If you charge one client but not another, you lose credibility and legal standing. Consistent enforcement also trains clients to prioritise your invoices.
- Be professional in your follow-up. When applying a late fee, reference the original invoice, the due date, and the specific clause in your agreement. Avoid emotional language.
How to Word the Late Fee on Your Invoice
Keep it clear and factual. Here are two examples:
- "Payment terms: Net 30. A late fee of 1.5% per month (18% annually) will be applied to balances unpaid after the due date."
- "Invoices not paid within 15 days of the due date are subject to a $50 late-payment charge plus 1% monthly interest on the outstanding amount."
Set Late-Fee Policies With Blank Invoice Maker
Add your late-payment terms to any invoice using the notes or payment-terms fields in Blank Invoice Maker. Set your due date, include the penalty clause, and download a professional PDF — free, private, and no sign-up needed.