How Much Interest Can You Charge on Unpaid Invoices?

It’s a common refrain for many small business owners: Where’s my money? Unpaid invoices are a problem for many companies, but can be especially trying on smaller operations that depend on timely payment for day-to-day survival. So, if you have overdue payments, can you charge interest on outstanding payments? And, if so, how much?

We’ll review best practices for charging interest on invoices for small businesses, including how much interest you can charge. We’ll also go through some tactics to retrieve late payments, plus how to set yourself up for more expedient payments going forward.

Charging Interest on Unpaid Invoices

The practice of charging interest on unpaid invoices is common for small and large businesses alike. As you find out how much interest you can charge on unpaid invoices, though, it’s important to remember that you’re not assessing these fees to try to make extra money or put a strain on your clients. Instead, it’s to encourage them to pay you on time, while also keeping your business relationships strong. Charging a crazy amount could very well lead to you losing a client, but charging nothing at all could also lead to clients delaying their payments indefinitely.

Common Interest Charges for Unpaid Invoices

You have a few options to consider when deciding how much interest to charge on unpaid invoices.

Option 1: One approach to take for charging interest on unpaid invoices is calculating the fee relative to the time the invoice is outstanding. Generally, many businesses will follow the 1.5% to 2% premium per month rule. 

In this case, you’ll need to figure out what that breaks down to daily. Here’s an example with an invoice for $1,000, which is 10 days late at a monthly late fee of 2%:

  • Figure out the monthly maximum late fee by taking the monthly rate and multiplying it by the invoice balance. Here, this would be $1,000 x .02 = $20.
  • Figure out the daily finance fee by breaking down the monthly fee by day. Here, this would be $20 / 31 (for a 31-day month) = $0.65 per day.
  • Multiply the daily rate by the number of days the invoice has been unpaid. Here, this would be $0.65 x 10 = $6.50 total late fee for a $1,000 invoice that is 10 days late.

Option 2: You can also just assess the late payment fee at the full percentage per month no matter how many days past the due date the invoice is in within a given month. So, for example, you would charge 2% interest on the first day it’s overdue as well as the 30th day it’s overdue. 

Option 3: Alternatively, you can try to assess a flat late fee on your invoices—say, a 10% late fee for an invoice, no matter how late it is. Clients may be less friendly to this set up, though, since it could end up costing them more, even if they missed the deadline by just a few days.

No matter the option you choose, when you send your invoice out for late collection, make sure that you note the late payment charges as well as how many days overdue and what notice this is (i.e. Second Notice, 30 days past due) so both you and your client have clear records.

Can You Charge Interest on Unpaid Invoices?

Yes, you certainly can—but you need to have spelled out the terms of interest charges or late fees in advance. This can happen in two places: Either in an initial contract with your client, or when you submit your invoice (though there might be pushback against the latter if you had an opportunity to specify this in a contract earlier). It’s important to note that if you didn’t establish with your clients that you’ll be charging a late fee before payment became overdue, you can’t really hit them with one after the fact.

What Happens If You Don’t Get Paid?

Despite sending out an invoice with clear terms about interest charges for late payments, it’s still possible you might not get the money from your client—at least not right away. Here’s what to do if you don’t receive payment on your unpaid invoices:

Understand Why You’re Not Getting Paid

Trying to figure out why you didn’t get paid isn’t actually an exercise in futility—it can actually help you track down your money. Ask yourself the following questions:

Terms and pricing

  • Were your payment terms clear on your invoice? If not, you might need to follow up.
  • Did you send over an invoice with the correct total (i.e. did you forget any discounts or simply enter the wrong amount)? If not, a client might not be paying because of a discrepancy.
  • Did the invoice’s total fall into the client’s expectations? If you ended up doing more work, for instance, the client might need to talk to you since it came in higher than they expected.
  • Do you have a framework established for being paid? If this is the first time you’ve worked with a client, make sure they know your accepted payment methods.

Client behavior

  • Is the client usually late? If not, you might just need to send a gentle reminder.
  • Is the client disorganized? If so, a reminder might help here, too.
  • Is your client very large? Sometimes, big organizations take longer to pay or have more steps to authorize payment, and you might need to reach out to their accounts payable department to make sure you haven’t missed any steps.
  • Is your client potentially unhappy? If there’s any question as to whether you provided the goods or services that your client expected, check in to make sure that they’re not unhappy with your work. Sometimes, you need to have a conversation before they will pay you.

Look at Legal Options

If you’ve tried to triage your situation with the above questions and you’re getting nowhere, you might want to look up bringing the unpaid invoice to small claims court in your area. You can also engage the services of a lawyer to threaten action on nonpayment. 

Free up Capital with Invoice Financing

If you aren’t getting paid, it’s helpful to know about invoice financing. Invoice financing is a type of small business loan in which a lender fronts you up to 85% of your unpaid invoice balance. When your client pays, you get the remaining balance minus any lender fees and a daily percentage for however long the invoice was outstanding. 

It’s not for everyone—not every small business owner can afford to lose some of the revenue on their invoice. However, if you’re in a cash flow crunch due to unpaid invoices, invoice financing is worth exploring, especially if having the money in hand could mean the difference between your company surviving or not. And, if nothing else, the fact that invoice financing exists and so many businesses take advantage of it shows you that unpaid invoices are a common problem.

Setting Yourself up to Get Paid Going Forward

Chasing lost money is the worst part of the job for many small business owners—sole proprietors and corporations alike. However, you can take some steps as a business owner to help avoid unpaid invoices in the future with both existing and new clients with some of these suggestions:

1. Be Clear About Your Terms

Drafting Contracts With New Clients

When you’re in the early stages of creating agreements with potential new clients, don’t forget to include payment information in the contracts or statements of work—whichever documents are signed. These should include:

  • Terms: The window in which the invoice is due after it’s received
  • Type of payment: Such as check, direct deposit, etc.
  • Late fee: The fee assessment and structure after a due date passes

You might also want to consider “dispute resolution” language in the case that your invoice or work becomes a point of contention between two parties (especially across state lines).

Reminding Existing Clients of Your Payment Terms

You almost certainly have your payment terms on your invoices already (such as “due upon receipt” or “net 30”). If for some reason you don’t, start there: Your clients can’t read your mind, or may be under the assumption that you have a certain payment setup, and if they’re on a different page about payment expectations, that very well could be the cause of your unpaid invoices.

Even if you do have your terms on your invoices, it might be worth it to send a kindly worded message to your client, copying in their accounts payable department reminding them of your payment terms. You, of course, may not be able to negotiate new payment terms or draft a new agreement with them, but putting your expectations in writing with their acknowledgement could set you on a path to getting paid on time in the future.

2. Send an Invoice as Soon as Your Job Is Done

Once all of your deliverables are in, or once you’ve provided the products you need to, don’t hesitate to send your invoice immediately. Even if it’s not due for a while, it’s important to get the invoice in your client’s system and put the ball in their court.

Remember that submitting your invoice earlier does not necessarily mean a faster payment. For instance, say you deliver early and your terms are due upon receipt. An accounts payable department might not be able to release your payment until the day after the expected due date due to their cash flow or monthly budgets. But, there are instances in which submitting an invoice early can benefit you. 

If you’re not already using business accounting software to help you get organized around invoices, it’s worth considering. Even as a single-person business, you might find it helpful; software such as QuickBooks Self-Employed enables you to see when clients view your invoices (or whether they haven’t at all), keep track of your due dates, and send automatic payment follow ups.

3. Don’t Worry About “Being Annoying”

As we’ve discussed, there are many reasons why invoices don’t get paid. Sometimes, people simply forget; other times, they’re disorganized; and other times still, you need to have a conversation about work quality that maybe they’re avoiding. Following up is essential to getting any of these situations fixed—and, remember, most places aren’t withholding your payment out of spite, so your follow-up could actually be helpful.

If you are worried about seeming like you’re nagging your client, there are ways to follow up politely. You can either use one of these unpaid invoice email templates, or send your own language along and let them know that you’ll be following up at another specific interval so it’s already on their radar.

The Bottom Line

It’s a common practice for businesses to charge about 1.5% to 2% per month for unpaid invoices. If you want to make this your practice, be sure to spell out these terms as early as possible so as to avoid any conflict with your clients.

And remember: Unpaid invoice late fees are meant to be a nudge to your client to pay, not a punitive action. If your client is good about paying as soon as you remind them that their invoice is overdue, it may be better practice to waive the late fee in order to keep a good, trusting, working relationship with the client. Just be sure to use your judgment.

Meredith Turits

Meredith Turits is a contributing writer for Fundera.

Meredith has worked as a writer and editor for more than a decade. Drawing on her background in small business and startups, she writes on lending, business finance, and entrepreneurship for Fundera. Her writing has also appeared in the New Republic, BBC, Time Inc, The Paris Review Daily, JPMorgan Chase, and more.

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