How to set and calculate late fees on invoices

Late fees are more than just penalties. You can use them as a tool to encourage timely payments and maintain healthy cash flow for your business. Setting them up correctly requires a plan that balances legal compliance, clear communication, and fairness to your clients.

Here’s how to structure and calculate late fees on invoices that work for your business without straining relationships.

What are late fees?

Late fees are additional charges that businesses apply to outstanding invoices when customers don't pay by the due date. They're essentially a financial penalty for late payment, similar to how your credit card company charges extra when you miss a payment deadline.

These fees create a financial incentive for customers to pay on time, which helps maintain predictable cash flow. When payments arrive as expected, you can better manage your own expenses and investments. Late fees also help offset the administrative costs and potential financial strain that come with chasing down overdue payments.

The most straightforward case for a business to apply late fees is when an invoice remains unpaid after the due date specified in your payment terms. Many companies also implement progressive late fees, where the penalty increases the longer a payment remains outstanding.

Some businesses apply late fees immediately after the due date passes, while others offer a brief grace period before charges kick in. Service-based businesses might add late fees to recurring monthly invoices, while product-based companies often apply them to one-time invoices that go unpaid.

Standard late fees and legal guidelines

Before you charge late fees, you need to know what standard fees are and understand the legal boundaries that govern them.

Percentages, flat fees, and interest rates

In the U.S., there are no federally mandated standard late fees for business invoices. Late fees are contractual matters that the parties must agree on, usually specified in the original contract, purchase order, or invoice terms.

You’d typically calculate late fees on invoices as either a percentage of the invoice amount or a flat fee. The standard range for percentage-based fees is 1–2%. Flat fees may be easier to manage if your invoices are similar in value.

Interest rates on overdue balances are another option. These are often calculated annually, but can also range from 1–3% per month if explicitly agreed upon in your contract. Be sure the rate complies with local laws and is clearly stated to maintain transparency and avoid disputes.

Legal considerations and state-by-state limits

Laws vary widely from state to state and may include maximum allowable fees and required disclosures. Non-compliance can lead to disputes or penalties. To avoid issues and stay up to date, always research the rules applicable in your industry, check your state government website, or consult a legal professional when drafting contracts.

How to calculate late fees on invoices: 3 simple options

Once you’ve established your policies, applying late payment fees is straightforward. Let’s look at the three most common methods: percentage, flat fee, and daily interest.

Option 1: Percentage-based late fees

Percentage-based late fees are ideal for scaling penalties based on invoice size. They're calculated with a simple formula:

Late fee = Invoice amount * Late fee percentage

To use this method, you would:

1. Determine the late fee percentage: Choose a percentage, usually 1–2%
2. Calculate the fee: Multiply the invoice total by the late fee percentage. For example, for a $2,000 invoice with a 2% late fee, the charge would be $40 ($2,000 * 0.02).
3. Update the invoice total: Add the late fee to the outstanding balance. In this example, the new total would be $2,040.

The new amount due will remain the same until the invoice is paid.

Option 2: Flat-rate late fees

Flat rates should be simple and fair. The amount you charge depends on your invoice size and what feels reasonable to your clients:

• Small invoices: For amounts under $500, $10–$25 is typically fair
• Medium invoices: For balances between $500 and $5,000, fees between $25 and $100 are common
• Large invoices: For amounts over $5,000, a flat fee above $100 may be appropriate, but should reflect your industry norms

Keep it proportional. An excessive fee could harm client relationships, so choose a rate that balances fairness with accountability. To apply a flat late fee, simply add it to the invoice amount.

For example, if a client is late paying a $1,000 invoice, and you apply a reasonable flat late fee of $25, the new invoice total would be $1,025. The new amount due will remain the same until the invoice is paid.

Option 3: Daily interest late fees

This method is suited for significantly overdue payments, incentivizing quicker repayment. You usually calculate interest daily using the formula:

Daily interest = (Outstanding balance * Annual rate) / 365 * Days overdue

Here’s how you would use this method:

1. Specify the interest rate in contracts: Clearly state the annual or monthly interest rate
2. Calculate the interest: Multiply the overdue balance by the daily interest rate and the number of days overdue. For example, for a $500 invoice that is 15 days overdue with an annual interest rate of 5%, the interest would be approximately $1.03, calculated as ($500 * 0.05) / 365 * 15.

The amount due increases on a daily basis until the customer pays the balance.

Choose the late fee option that best fits your business model and client expectations. Clear communication and consistent application of your policies will improve cash flow while maintaining your customer relationships.

Setting and communicating late fee policies

Clear policies build trust, protect your interests, prevent disputes, and set the stage for smoother client interactions. Here’s how to get it right:

• Choose the right approach: Decide whether percentage-based fees, flat fees, or interest on overdue balances work best for your business. Tailor your choice to fit your invoice size, industry norms, and client expectations.
• Spell it out in contracts: Include late fees in your agreements. Outline your terms clearly to encourage compliance. Make sure you're following your state's laws.
• Make it clear on invoices: Reinforce your policy on every invoice. Use a template or invoice management software to establish and maintain consistency.
• Communicate early and often: Discuss late fees during onboarding or contract negotiations. When clients know the rules from the beginning, it’s easier to avoid misunderstandings and maintain goodwill.
• Update terms with notice: Always provide written notice at least 30 days before implementing new late fee policies, and make sure existing clients formally acknowledge the changes through updated contracts or signed addenda
• Enforce terms consistently: Apply late fees consistently, and send automated payment reminders before the grace period expires to maintain transparency and preserve professional relationships

By establishing clear terms up front and enforcing them consistently, you create accountability while maintaining professionalism and your reputation.

Invoice late fee wording

Clear language on your invoices helps clients understand your late fee terms and makes it easier for them to comply. Here are some examples of how to phrase your invoice late fee wording for each of the methods above:

• Percentage-based: A 2% late fee will be applied to the total invoice amount for payments received more than 30 days after the due date.
• Flat fee: A $25 late fee will be added to any invoice not paid within 15 days of the due date.
• Daily interest: Past-due balances accrue interest at 1.5% per month (18% annually), calculated daily from the original due date until paid in full.

Here are some other options you can use:

• A late fee of 1% will be applied to any invoice not paid within 5 days of the due date.
• Past-due accounts are subject to a 2% monthly service charge on the outstanding balance.
• Payment is due within 30 days. Late payments will incur additional charges as outlined in our service agreement.
• This invoice becomes past due after 15 days. Late fees will be automatically applied to overdue balances.
• Please remit payment by the due date to avoid additional charges. See contract for complete late fee terms.
• Payments made more than 30 days past the invoice date will incur a $25 late fee or 2% of the outstanding amount, whichever is greater.

Choose wording that matches your fee structure, keep it professional and straightforward, and communicate terms consistently across all invoices.

Tips for managing late fees on invoices

Implementing invoice late fees requires balance. Here are some strategies to help you enforce them effectively while staying fair to your clients:

• Be flexible with long-term clients: Loyal clients with strong payment histories may appreciate a waived late fee as a gesture of goodwill
• Apply fees consistently: Set clear rules and stick to them. Document any exceptions to avoid confusion or the perception of unfairness.
• Automate the process: Tools like Ramp simplify late fee management by calculating charges automatically and sending reminders, saving you time and encouraging compliance
• Follow local laws: Always align your policy with regional rules. If you're unsure, consult your state government's website or a legal professional.
• Choose the right calculation method: Flat fees offer predictability, percentages scale with invoice size, and interest incentivizes prompt payment. Pick the option that fits your business and resonates with your clients.
• Handle disputes professionally: When clients question late fees, review the situation promptly, reference your written agreement, and be willing to negotiate reasonable solutions to preserve relationships

Clear policies, reasonable expectations, consistent enforcement, and professional handling of exceptions create accountability without sacrificing goodwill.

Simplify invoice tracking and payment processes with Ramp

Organizing invoices and managing late fees on overdue invoices doesn’t have to be a manual, time-consuming process. Ramp’s automation tools can streamline your billing and ensure you never have to chase payments again.

With Ramp, you can:

• Manage vendor relationships easily: Track spending, store contracts, and analyze vendor data from one platform
• Automate invoice processing: Simplify AP workflows with automated invoice entries, approvals, and payments
• Gain real-time visibility into spend: Monitor cash flow and identify trends with instant expense insights

Managing invoices is easy. Start streamlining your payment processes with Ramp's invoice management software.