What is a Finance Charge? 2025 Guide with Examples

How does a finance charge work? (5 steps)

A finance charge is a fee you apply to a customer’s account when they don’t pay on time. It’s often added as interest, but it can also be a flat fee to help cover your time and costs. Here’s a simple breakdown of how it works and what to do at each step.

1. Set clear payment terms

Start by laying out clear payment terms with your customers. Net 10, Net 30, and Net 60 are common—meaning payment is due in 10, 30, or 60 days. Add these terms to your invoices, contracts, and any customer agreements so there’s no confusion later on.

2. Decide on a grace period

You might want to give customers a little extra time before charging a late fee. A grace period of 7, 10, or 14 days is common and can help maintain good relationships. If you go this route, just be sure to clearly include it in your payment terms.

3. Calculate the finance charge

Once the grace period ends and the payment still hasn’t come through, it’s time to apply a finance charge. You can charge a flat late fee (like $25 per missed payment) or a percentage of the unpaid amount (say, 1%-2% per month). Either method works—it just depends on what makes sense for your business.

4. Update the invoice

After you’ve calculated the charge, update the invoice with the new total. You can either send a fresh invoice that includes the late fee or add a quick note to the original one explaining the added charge. Make sure the customer knows what’s changed and what they now owe.

5. Follow up and enforce payment terms

If the invoice is still unpaid, don’t be afraid to follow up. A friendly reminder by email or phone is often all it takes. If they’re having trouble paying, consider offering a payment plan. But if the balance keeps hanging out there, you may need to bring in a collections agency or explore legal options.

The key is to be consistent, professional, and clear—so customers understand your policies and your business keeps running smoothly.

Placing finance charges on a bill

Finance charges are typically included within a customer’s invoice. The invoice should make it clear what the one-time or monthly payments are to avoid confusion. Make sure to have a discussion with your clients before putting a charge on their invoice.

In addition to discussing these fees with your customers at the beginning of a new engagement, you’ll want to send several notifications to help your customers avoid overpayment.

Alert your customer a week before your payment is due and a day after the invoice due date has elapsed. At that point, you will want to send a finance charge letter as a heads-up that you’ll charge interest if the payment continues to be late.

Ways of finding ongoing finance charges 

Keeping up with finance charges is key to maintaining cash flow and staying on top of your business’s financial health. Here are some simple ways to track and manage them.

Use accounting software

Instead of manually calculating finance charges, let accounting software do the work for you. Many platforms can:

• Automatically track overdue invoices and apply finance charges.
• Send reminders to customers about upcoming and past-due payments.
• Generate reports so you can see how much you’re earning from finance charges.

Keep a finance charge log

Even if you use accounting software, it helps to keep a simple record of finance charges to give you a quick snapshot of which customers consistently pay late and how much you’ve collected in finance charges. 

To do this, create a spreadsheet that tracks customer names, invoice numbers, the original balance due, the date finance charges were applied, and the total amount accrued over time.

Reconcile your accounts regularly

Make it a habit to review and reconcile your accounts every month. This process helps:

• Confirm that you applied finance charges correctly.
• Identify any payments that haven’t been recorded.
• Adjust for any waived or disputed charges.

Helping customers pay off a finance charge

Nobody likes seeing a small bill turn into a bigger one. Finance charges can encourage on-time payments, but they can also frustrate customers, especially if the payment process is confusing. That’s why it’s important to be clear, consistent, and customer-friendly.

Here are a few ways to help customers pay off finance charges while keeping relationships strong:

• Make it easy to pay: Offer simple, secure payment options like credit cards, ACH transfers, or mobile payments. The fewer steps it takes, the faster you'll get paid. Plus, you can use tools like QuickBooks Payments for even more convenience when getting paid.
• Be clear about totals: Always include the full balance—finance charge, and all—on updated invoices. No surprises.
• Send friendly reminders: A polite email or text reminder can go a long way toward prompting action.
• Stick to your terms: Be firm with your policies, but professional and respectful in your communication.
• Stay flexible when it makes sense: For loyal customers or one-off situations, consider offering a payment plan or waiving a fee. It’s about the big picture, not just one invoice.

Even if you have a standard policy, every customer and situation is different. Consider factors like payment history or the length of your relationship before applying a charge. Finance fees are a useful tool—but how you use them can either build trust or push customers away.

Finance charges and regulations

It’s important to keep tabs on rules and regulations regarding the use of finance charges in your small business. Finance charges are regulated by the government per the Truth in Lending Act (TILA), which requires lenders to disclose loan cost information, such as:

• Annual percentage rate (APR)
• Standard and penalty fees
• Payment schedule
• Total loan amount
• Number of payments

This act was passed in an effort to provide consumers with the information they need to make smart financial decisions and comparison shop for loans. Moreover, the Credit Card Accountability Responsibility and Disclosure Act of 2009 was an addition to the TILA. Also known as the Credit CARD Act, it protects borrowers and curbs predatory lending practices.

Regulations and updates for 2025

As you plan for the year ahead, it’s important to stay informed about regulatory changes that could affect your business, especially if you extend credit to customers or deal with payment processing. 

Here are a few key updates to note for 2025:

• The Consumer Financial Protection Bureau (CFPB) has announced a new rule limiting overdraft fees to about $5 for banks and credit unions with more than $10 billion in assets. This rule will go into effect on October 1, 2025.
• In November 2024, the CFPB issued a final rule that updated dollar amounts for certain laws related to TILA based on changes in the Consumer Price Index (CPI). These updates impact credit cards, high-cost mortgages (HOEPA), and qualified mortgages, and will be in effect for 2025.
• In 2025, consumer reporting agencies can charge a maximum of $15.50 for providing disclosures to consumers under the Fair Credit Reporting Act (FCRA).

These changes may not apply to every business, but it’s a good idea to check whether they affect your payment policies or customer agreements. Staying compliant now can help you avoid headaches down the road.

Automate billing and stay in control of cash flow

When it’s time to apply a finance charge, using accounting software like QuickBooks can simplify the process. It helps you track overdue payments, calculate fees, and automatically update invoices—saving you time and reducing errors.

Having a clear, consistent policy that includes finance charges protects your business and encourages timely payments to improve your overall cash flow.

Disclaimers:

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