Late payment interest

A clause charging interest or a fee on overdue invoices, giving the payer a reason to pay on time and compensating the supplier for the wait.

What it means

A late payment clause sets what happens when an invoice is not paid by its due date. The most common form is interest on the overdue amount, such as 1 or 1.5 percent per month. Some contracts add a flat late fee or the cost of collection, including attorneys’ fees.

A consultant sends a $5,000 invoice on Net 30 terms with 1 percent monthly interest. If the client pays two months late, the consultant can add about $100 in interest. That is not much, but it gives the consultant a written right to charge it and gives the client a reason to move the invoice up the pile.

Rates are limited by law. Many US states have usury laws that cap interest, and a flat fee far above any real cost can be challenged as an unenforceable penalty. The limits, and whether they apply to business deals, vary by state. Some jurisdictions, including EU member states and the UK, give suppliers a statutory right to interest on late business payments even without a clause. A well-drafted clause charges the stated rate or the maximum legal rate, whichever is lower.

What to watch for

  1. Check that the rate is stated clearly, per month or per year, along with when it starts running.
  2. See whether the clause includes a “lesser of this rate or the maximum legal rate” fallback to avoid usury problems.
  3. Look for a right to suspend work when payment is overdue, which is often more effective than interest.
  4. Confirm whether collection costs and attorneys’ fees can be recovered, and whether that right runs both ways.

Example clause

Amounts not paid when due will accrue interest at the lesser of 1.5 percent per month or the maximum rate permitted by law, from the due date until paid. Contractor may also suspend the Services on 10 days’ written notice if any invoice remains unpaid more than 30 days after its due date.

Overdue invoices earn interest, and a long-unpaid invoice lets the contractor pause work.

Legal glossary