Interest and Late Fees on Overdue Invoice
Jun 30, 2020
A Detailed Guide to Explain Late Fees on Overdue Invoice
For an overdue invoice, there’s no applicable interest rate. After the payment date is overdue, the late fee is decided willingly by the vendor. You must inform the customer of an extra fee beforehand so there won’t be conflict. Both parties should have agreed upon a fee after the invoices are overdue.
This aspect of the chapter will cover:
- Late Fee
- Standard Late Fee on an Overdue Invoice
- When to Charge a Late Fee?
- Is it Legal to Place Interest on An Overdue Invoice?
A late fee is an extra charge a vendor adds to an overdue invoice or a past due invoice. Late fee payment is included when the payment terms on an invoice past due to the vendor.
The terms of the payment are the duration specified by the vendor for the customer to pay an invoice. Commonly, you’ll find terms like “net 30 days”, “net 90 days”, ” payable upon receipt” for chasing payment.
For most businesses, “net 30 days” is very common, because of the cash flow. You’ll find terms and conditions and the fee charges on almost every invoice and an overdue invoice email.
Standard Late Fee on an Invoice
There’s no regulated standard late fee for any business. Late fees can be charged every at a flat rate or a monthly percentage of the total amount for the past due invoices.
For small businesses, there is a need to weigh up the cost of future business when charging late fees for invoices past due. As the business owner, following up on overdue invoices should be a key part of your strategy to get paid, when some customers fail to pay, you make sure to be patient with them to avoid destroying customer relations.
When to Charge a Late Fee
A vendor or a business person will start charging a late fee as soon as the customer’s invoice is overdue to get paid. For example, if the payment term on the invoice is thirty days, the vendor will start adding extra charges after the thirty days have elapsed. As a vendor, you are advised to exercise little patience for the reminder after some days when the payment is overdue, based on the relationship with the client.
Also, you should consider how often the client pays and the number of unpaid overdue invoices you have outside.
Exercising patience for a few days is important because the client may be on the verge of making their payments. If you have to add extra charges at the time, you may be regarded as an unprofessional business owner to the customer.
Note that the customers may have it in mind to pay on time, but for unexpected emergencies, they delay the payment. By being patient a bit, customers will look for means to pay you on time.
When you add extra charges in your payment reminders, the payment may not be worth the stress you have undergone.
Annie’s Pastries in San Diego, California, delivers pastries five days a week to Mark’s investors, a company about 10 minutes walk from her store. Every week the price of the pastries she delivers is about $200.
Annie submits an invoice of $800 at the month-end and her payment terms in the invoice state that payment is due after thirty days of receiving the invoice.
After 30 days, Annie doesn’t check on Mark’s investors, and her policy is to bill an unpaid invoice an 8% monthly fee, of which her policy is to avoid late payments from clients. For every 30 days that the invoice is delayed, there’s an additional $64 on the actual amount, which is $2.13 every day.
The challenge here is when Annie should start sending payment reminders to Mark’s investors for her invoice payment. She’s a busy person surrounded by a hectic task with a small enterprise, and the $800 may likely affect her cash flow. The $2.13 additional fee, if collected, won’t add anything to her business.
The best thing for Annie is to make a call for a reminder almost every day for getting paid after her payment is overdue to her debtor, Mark. She calls Mark to find out that he’s been sick or something else is there for about a week, just around the time she sent the invoice. He was then flown overseas for business meetings for up to 2 weeks; for this reason, her invoice has been delayed.
Later, Mark promised to pay her invoice; he calls her later in the day to inform her that he’s working on it and sends the check later under 48 hours.
Assuming she didn’t receive such a reception from Mark, maybe she couldn’t place a call directly to him, and she sends him a polite message reminding him of the late payment. She informs him of sending the overdue invoices again to his Email as a payment reminder, which she later did.
No action was taken by Mark for more than a week, and she didn’t receive her payment in the account. Annie, at this point, has tried her best to convince Mark to pay for the invoice and is the end of thirty days. She activates the 8% monthly interest and submits the invoice again along with the client name, actual amount details, late fees, account details, the amount after late charges, and all the invoice-related information.
Is it Legal to Charge Interest on Overdue Invoices?
Yes, it is legal for a vendor to charge interest on unpaid invoices and there is no problem in changing for overdue invoices and the due date is passed. A vendor has the right to do so after the client fails to honor their payment policy. The main question is whether the client is mandated to pay the interest.
Before a vendor or small business owner charges interest on an unpaid invoice to the customers, both he and the client have to agree with his payment terms before a friendly reminder is sent. A client is right not to pay the extra money only if they didn’t agree with the vendor before the start of work or sale. With an agreement, both parties including vendors and payers will know what they are expecting after the invoice is overdue.
Looking into Annie’s case, when Mark first contacted her, and she gives him a form to fill in the form of an agreement, the form will receive Mark’s signature at the time of sale. If Annie had stated her interest terms clearly in the form, Mark would have read and agreed to the point terms before signing the form.
The terms and policies are always in bold fonts and at the bottom of the order form which most of the companies include.
If Mark signs and sends back the form to Annie, that means he is convenient and comfortable with her policy. She has a strong case and can take legal actions against Mark if he fails to add interest.
At times, the customer chooses to pay the late fee so that he and the vendor can continue doing success in their business. If Mark finally realizes that he’s to pay an extra charge because of late payment, and there’s another invoice in line for another month of pastry supplies. He can challenge the amount of an extra fee because he feels Annie will want to keep doing business with him.
He chooses to pay the extra charge and continue doing business with Annie because her services or products are top-notch and fast. From a legal view, he is supposed to pay everything due because he has agreed to the terms before signing the order form to avoid problems.
With all the clarity and respect both vendors and buyers can do business without any complications. Everything goes with the flow as both the parties agree to the invoices’ terms and conditions.