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Should you charge late payment fees? Pros and cons to consider

Here’s a situation no business owner or freelancer wants to deal with: invoices way past their due date. You’ve provided the agreed-upon service or product. You’ve sent out an invoice. You’ve waited and waited, and now it’s been months since you sent out the original invoice. Do you charge your customer a late payment fee in addition to pursuing the outstanding balance?

One of the toughest decisions businesses have to make is how to approach past due invoices. Freelancers and small business owners are particularly vulnerable to the negative effects of overdue payments. Why? Because when you’re running a business, multiple late invoices can negatively impact your cash flow and ability to run your operations.

In this article we’ll explore when you might need to assess late charges, how to create a late payment policy, and how to encourage prompt payments. Keep reading for a full explanation of late payment fees, or jump ahead to the section that directly answers your query.

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What is a late payment fee?

A late payment fee is an extra charge fined against a client for not paying a bill by its agreed-upon due date. To charge a late payment fee, you must include payment expectations within your original contract or sales agreement. In addition, when charging a client a late fee penalty, the invoice provided must list the due date and the late fee percentage or amount.

What is a reasonable late payment fee?

Business owners have the option to charge a flat rate or a monthly finance charge, usually a percentage of the overdue amount. Companies typically assess a 1% to 1.5% late fee.

Illustration shows woman at computer, with the text “businesses can only assess a late fee if the original sales contract outlines this option. Companies typically assess a 1% to 1.5% late fee.”

To calculate the interest rate for a late fee, you’ll first need to decide on the annual interest rate. Once you have your annual interest rate, divide that by 12. This number will be your monthly rate. Then you’ll multiply the monthly rate by the amount due to get the monthly late fee charge.

Let’s look at an example:

You charge a 12% annual interest rate. A $12,000 project is overdue for payment by one month. To figure out the monthly finance charge, you’d multiply the outstanding $12,000 by the monthly interest rate (1% or .01). You’d arrive at a monthly finance charge of $120. The new outstanding balance would be equal to $12,120.

Is it legal to charge late payment fees?

It is legal to charge late payment fees; however, as mentioned, you can only do so if the original contract allows it. There are also state-specific regulations and laws regarding the amount a business owner can charge for a late payment fee.

How to deal with late payments and unpaid invoices

When you don’t get paid on time, it can have a ripple effect on your business. Without money flowing in from services rendered, you might not be able to pay your suppliers or utility bills. This is especially true if you’re running on tight profit margins. You have a few different options to encourage clients to pay promptly: charge a late fee, use a payment plan, or offer an extension.

Charge a late fee

One way to handle unpaid invoices is to charge a late fee. Remember: Pay attention to usury laws in your specific state or seek out legal advice if you’re unsure of the maximum interest you can charge.

Illustration shows stopwatch, with the text “Late fees can vary, and you have the option to charge a flat rate or a percentage of the customer’s bill.”

Use a payment plan

In some cases, a customer might hit a financial rough patch and be unable to pay their invoice by its due date. Instead of charging a late fee, you can offer customers a payment plan.

Payment plans should clearly outline the minimum amount of payment required along with any interest rate charged for the outstanding balance. A customer can continue to make the minimum payments each month to avoid having a bill in collections.

Offer an extension for first-time late payments

  • If a customer regularly pays on time but doesn’t have enough money to pay one month, consider offering an extension to the next month. You can also implement extended payment terms in 60-, 90-, or 120-day time frames so customers have more time to pay in full.
Illustration shows a man sitting at a computer, with the text “Freelancers spend an average of 20 days a year tracking down money owed for late payments. Source: The Association of Independent Professionals and the Self-Employed

Invoice management tips

  • Maintaining well-managed invoices is the first step to ensuring you get paid on time.

Use automated invoicing

  • Rather than waiting on snail mail, you may want to consider automated invoices to limit the number of late payments you receive. Automated invoicing allows you to quickly send out invoices, which can save you precious time and effort. If you have clients you bill regularly, you can also set up recurring billing to automate recurring payments.

QuickBooks Money allows you to build and send instantly payable invoices that get paid up to 4x faster than paper invoices1 — all without a QuickBooks Online subscription. Customers can pay invoices instantly online using whatever method is most convenient for them, including PayPal, Venmo, Apple PayⓇ, credit and debit cards, and ACH bank payments. Upgrade to a QuickBooks Online subscription to set up recurring invoices and manage accounting.

Keep track of unpaid invoices

It’s a good idea to get into the habit of keeping tabs on unpaid invoices . After all, you’re going to have a hard time collecting past due payments if you don’t know they’re past due in the first place. To avoid losing out on money you’re owed, track your invoices and follow up on late ones.

  • Regularly tracking invoices can help you create a healthy cash flow and ultimately help boost your net profits. An easy way to track and manage your invoices is by using accounting software like QuickBooks. With QuickBooks, you can set up invoice reports and notifications to alert you to both paid and unpaid invoices. You can also choose a set time each month or quarter to check in on delinquencies.

Send payment reminders

Payment reminders can be an effective strategy to resolve overdue payments. Payment reminders are a less aggressive way to request the money you’re owed instead of going straight to a collection agency.

Deciding between sending an email or mailed reminder? Well, email reminders are quick and easy to send compared to mailed reminders, which require postage and delivery time.

  • Make sure your invoice reminder includes accurate contact information for your company’s billing department. It’s important to make it as easy as possible for your customer to reach out to you. In the event of issues with an invoice, like making a payment deadline or reporting a billing error, easy-to-find contact information streamlines the resolution process.

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Expand your payment options

Inflexible payment options can be one reason a customer doesn’t pay an invoice on time. Consider expanding your payment methods so customers have plenty of ways to settle up. Do you accept credit card payments from all credit card issuers, including American Express and Discover? If possible, let your customers pay with cash, credit cards, electronic funds transfers, checks, third-party payment systems, and wire transfers. Give your customers flexible ways to pay with QuickBooks Payments — available without a QuickBooks Online subscription in QuickBooks Money.

Offer flexible ways customers can send you their payment information, too. Some customers might feel more comfortable dropping off a physical check at your storefront or giving their credit card information over the phone. If you use QuickBooks Money to send your invoices, you can offer various online options that make it easy for your customers to make payments.

Illustration shows abstract invoice, with the text “Incentives for paying on time: Late fees might make your bill a priority, but you can also give a prompt payment discount to achieve the same result.”

Offer discounts for prompt payment

Sometimes it’s better to lead with a carrot than a stick. Consider offering a small discount, 1% or 2% of the bill, in exchange for payment within 10 days or a time period you prefer. Discounts in exchange for early payment also may help lower the number of late invoices.

How to create a late payment policy

Want to make sure your business is protected from delinquent accounts? Here’s our step-by-step guide for creating a late payment policy for your business.

1. Send out an invoice with late payment policy

Make sure the invoice lays out the details of late charges up front. It should also lay out the payment terms and the number of days the customer has to make the payment.

Include details like the invoice creation date, payment terms, total amount due with tax, product or service rendered, contact information, business name, and payment due date. Accounting software from QuickBooks can automate these details for you.

2. Send out payment reminders

You can send an email invoice directly after the transaction occurs and a follow-up email if the bill goes unpaid after a certain period. A payment reminder should nudge the customer politely to call attention to the upcoming invoice obligation.

3. Charge a late fee for a delinquent payment

If a customer still has unpaid invoices, send another reminder with the late charge that details the total outstanding balance. Give a deadline for payment with a warning that you will be forced to consider your legal options in claims court if the overdue payment isn’t settled.

A debt going to a collection agency has serious consequences. It can lower a customer’s FICO credit score and be a serious blemish on their credit history. As a result, the prospect of facing these consequences can prompt a customer to take the invoice seriously. Hopefully, though, your past due invoices won’t get to this escalation point.

How to add late fees to invoices in QuickBooks

Skip the cumbersome process of manually tracking late fees. QuickBooks can apply late fees automatically based on your settings. Stipulate when a late fee applies, then the fee amount; this charge can either be a percentage of your overall invoice amount, a flat fee, or a combination of both.

To set up automatic late fees in QuickBooks Online, log in as Company Administrator or Master Administrator. Under Settings, select Account and Settings, then choose Sales. Within this section, select Late fees; check the box to turn on late fees, then specify the fee type, grace period, amount, and how the late fee will be recorded on an invoice.

Learn more about setting up and applying automatic late fees with QuickBooks Online.

Wrapping up: Late payment fees and their impact on business

Everybody wants to be paid on time. But late invoices might be a problem you have to face head-on. If you’re struggling to collect payments on time, consider changing your terms of payment or altering the late payment language on your invoices. It’s also a good idea to use automated invoicing systems and accounting software like QuickBooks. Business owners can use QuickBooks to manage all invoices and track down missing payments more easily.

QuickBooks Money is a new money management tool from QuickBooks available without a subscription. Use QuickBooks Money to send and track instantly payable invoices, accept digital payments, and get paid faster.

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QuickBooks Payments: QuickBooks Payments account subject to eligibility criteria, credit, and application approval. Subscription to QuickBooks Online required. Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services. For more information about Intuit Payments' money transmission licenses, please visit

QuickBooks Money: QuickBooks Money is a standalone Intuit offering that includes QuickBooks Payments and QuickBooks Checking. Intuit accounts are subject to eligibility criteria, credit, and application approval. Banking services provided by and the QuickBooks Visa® Debit Card is issued by Green Dot Bank, Member FDIC, pursuant to license from Visa U.S.A., Inc. Visa is a registered trademark of Visa International Service Association. QuickBooks Checking Deposit Account Agreement applies. Banking services and debit card opening are subject to identity verification and approval by Green Dot Bank. Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services. Other fees and limits, including transaction-based fees, apply.


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1 “Get paid 4x faster”: 'Four times faster’ based on U.S. customers using QuickBooks Online invoice tracking and payment features, compared to customers not using these features, from Aug 2022 to Jul 2023.

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