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Interest and late fees on an overdue invoice
If your contract sets a rate, that rate normally governs. The state figures below are the statutory default that applies when it does not — they are not a cap on what you may agree to.
Total now owed
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Enter the invoice amount and how overdue it is.
What you may charge, and where that number comes from
A late charge on a business invoice has three possible sources, and they rank: the rate the parties agreed to, on the quote, the credit application or the purchase order terms; a statutory default where the contract is silent, nearly every one of which applies only where the parties have not agreed a rate; and a prompt-payment statute where the payer is a public agency or the job is construction, which applies whether or not the contract mentions interest.
A statutory rate is a default that applies when the contract is silent, not a ceiling on what the contract may say. Usury statutes do cap agreed rates in some circumstances; a judgment-interest or legal-rate provision caps nothing.
Prompt-pay rates are widely misquoted in the other direction: Texas fixes late payment by a governmental entity at prime plus 1 percent per year under Tex. Gov't Code Ann. § 2251.025, not per month. The state-by-state reference sets out what each supplies.
Why a late charge is usually not interest, and the two limits that survive
Usury statutes are almost universally written to reach interest on the loan or forbearance of money. A charge on an unpaid invoice is generally neither: you did not lend money, you delivered goods or services and were not paid. It is treated as liquidated damages — compensation for carrying and collecting a late account.
The anchor is the New York Banking Department (now Department of Financial Services) Office of General Counsel opinion of 22 March 2000, which concluded that late charges on delinquent accounts are not interest subject to New York's 16 percent civil usury limit in General Obligations Law § 5-501: “the 16% rule only applies in cases in which there is intent to lend money, not to a late charge.” The opinion is informal, not an official interpretation of the Banking Law. Two constraints survive it.
- It has to be disclosed in advance. A customer must be given notice of the late charge before incurring the obligation. A term first printed on a past-due notice is the weakest position there is.
- Criminal usury can bite where civil usury does not. A rate above 25 percent could be illegal under the criminal usury prohibition in § 5-521(3), which reaches corporate borrowers who cannot raise the civil defence.
The penalty doctrine: a fee out of proportion to the harm is unenforceable
Calling a charge liquidated damages invites the oldest test in contract law: such a clause is enforceable only as a reasonable forecast of harm that was difficult to estimate in advance, and is unenforceable as a penalty if grossly disproportionate to the loss the breach actually causes — the common-law rule restated in Restatement (Second) of Contracts § 356(1).
Easy to defend: a flat charge small relative to the invoice, or a percentage in line with your cost of money plus the cost of chasing the debt. Exposed: a charge that compounds aggressively, one imposed repeatedly on the same missed payment, or one levied on the whole balance rather than the overdue instalment.
California has codified the test at Cal. Civ. Code § 1671, and its courts have struck late charges and default-interest step-ups bearing no relation to actual delay damages. Set one disclosed charge a court can read as compensation, not as pressure to pay.
One and a half percent a month: a convention, and Georgia's statute
“1.5% per month on past due balances” is the most common late-fee term in American business invoicing. It is a convention, not a legal standard: no general rule blesses it, and its ubiquity is not a defence.
Georgia is the exception, and it repays stating precisely, because summaries drop the conditions. Ga. Code Ann. § 7-4-16, headed “When interest runs on commercial accounts; maximum interest rate on commercial accounts”, permits interest at a rate not in excess of one and a half percent per month on that portion of a commercial account which has been due and payable for 30 days or more — that portion, not the whole balance. Three further conditions travel with it:
- Once that threshold is crossed, interest is calculated on the amount owed from the date it became due and payable until paid — the original due date, not day 31.
- A commercial account becomes due and payable on the date a statement of the account is rendered to the obligor, unless otherwise provided in a writing signed by the obligor.
- “Commercial account” is defined by exclusion: an obligation for goods or services other than a retail installment transaction as defined in O.C.G.A. § 10-1-2(a)(10), so consumer transactions fall outside only where evidenced by a retail installment contract or revolving account.
The statute states no annual figure; converting it to a yearly percentage is a gloss. It was last amended effective 1 July 2024 by SB 448, a housekeeping change with no substantive effect; the rate and the 30-day trigger are unchanged since 1980. This is the rare instance of a legislature supplying the number vendor guides pretend exists everywhere.
Two states deserve care before billing 18 percent annualised.
- Vermont. 9 V.S.A. § 41a(a) sets the default rate at 12 percent per annum; the 18 percent figures in § 41a(b) attach to particular lender and collateral types, not a general permission. An 18 percent annualised charge exceeds that default. There is a business-purpose escape at § 46(2), but by its terms the parties “may contract for a rate of interest in excess” — so relying on it depends on the higher rate having been contracted for, which a charge stamped unilaterally on an invoice is not. Whether the chapter reaches open-account trade credit at all is an open question, and no Vermont decision on the point was found.
- North Dakota. N.D. Cent. Code § 47-14-09 caps interest at 5.5 percentage points above the six-month Treasury bill average, floor 7 percent, declared monthly by the state banking commissioner and published by the Department of Financial Institutions — 9.154 percent for August 2026, roughly half of 18 percent. Its exclusions are entity-type (a corporation, LLC, cooperative, trust, or a partnership filing a partnership return) and dollar-threshold (principal over $35,000), not business purpose — a distinction vendor guides collapse. The exposed case is an 18 percent charge billed to a sole proprietor or individual on an invoice of $35,000 or less; § 47-14-10 provides forfeiture of all the interest plus 25 percent of the principal.
The federal Prompt Payment rate, and what it actually governs
The federal Prompt Payment rate is the most misapplied number on this subject. It governs late payments by federal agencies to their vendors — not private invoices — and it is not a cap on what a private party may charge.
The authority is the Prompt Payment Act, 31 U.S.C. ch. 39, with the rate set by the Treasury under 41 U.S.C. § 7109(a)(1) and published semiannually in the Federal Register, the same figure as the Contract Disputes Act rate. For 1 July 2026 to 31 December 2026 it is 4-3/4 per centum per annum, or 4.75 percent, and it resets each 1 January and 1 July; confirm the current period before using it.
On a federal contract the statute and the applicable FAR clause decide what accrues, generally 30 days after receipt of a proper invoice, and it is distinct again from federal post-judgment interest under 28 U.S.C. § 1961.
Drafting it, invoicing it, and what to do when it is disputed
Most late-fee disputes are lost before the invoice is issued. The sequence that avoids it:
- Put the rate in the terms before the work, where the customer saw it before incurring the obligation, and state it completely: the percentage, the period, the day it starts running, whether it compounds, whether it applies only to the overdue amount.
- Fix the due date so the start point is not arguable; the due date calculator works out which day the clock starts.
- Apply it consistently and invoice it as it accrues. A charge waived for most customers, or first appearing in a demand letter months later, is weak.
When a customer disputes it, ask whether the invoice itself is disputed or only the fee. If the work is in dispute, pressing the late charge hardens the position. If only the fee is contested, produce where the term was disclosed, when it started running and how it was calculated. This is general information, not legal advice; where a real sum is at stake, an hour of a lawyer's time in that state is worth it. If your problem is late residential rent, a separate body of law applies — use the rent late fee calculator instead.
Frequently asked questions
Is 1.5% per month legal?
In most states, on an ordinary business invoice, with the term disclosed before the customer incurred the obligation, it is a defensible charge — and it is what most American business terms use. But it is a convention, not a rule: no general statute blesses it. Georgia comes closest to an exception, permitting interest not in excess of one and a half percent per month under Ga. Code Ann. § 7-4-16, though only on the portion of a commercial account due and payable for 30 days or more. Vermont, whose default rate is 12 percent per annum, and North Dakota, whose ceiling floats well below 18 percent, are the two places where that figure deserves specific advice.
Can I charge a late fee if my contract never mentioned one?
Not the fee you would like, usually. The notice condition does the work here: the customer is meant to have known about the charge before incurring the obligation, so a rate that first appears on a past-due notice is the weakest possible position. What you may still have is a statutory default. Most states supply a legal or judgment rate that applies precisely where the parties did not agree on one, and Georgia goes further with an express commercial-account rate. If the payer is a public agency or the job is construction, check the state prompt-pay statute, which can apply whether or not your contract says anything.
Does the federal Prompt Payment rate limit what I can charge?
No. It governs late payments by federal agencies to their vendors under 31 U.S.C. ch. 39, with the rate set by the Treasury under 41 U.S.C. § 7109 and published twice a year in the Federal Register. For 1 July to 31 December 2026 it is 4.75 percent per annum. It is neither a floor nor a ceiling for private invoicing; it is simply not addressed to private parties. It is useful as a benchmark, since it sits at the low end of the statutory spread, and it is essential if you invoice a federal agency — in which case the statute and the applicable FAR clause govern, not your terms.
My customer says the fee is a penalty. Are they right?
They are invoking a real doctrine. A stipulated-damages term is enforceable only as a reasonable forecast of harm that was hard to estimate at the time of contracting, and unenforceable as a penalty if it is grossly disproportionate to the actual loss. A modest flat charge, or a periodic percentage near your cost of carrying and collecting the debt, is straightforward to defend. A fee that compounds hard, repeats on the same missed payment, or applies to the whole remaining balance rather than the overdue part is what courts strike. Whether yours survives depends on the facts and on the state.