Payment Terms
How to Write a Late Fee Policy That Actually Works
Short answer
A workable late fee policy is 1–1.5% per month after a 5–10 day grace period, disclosed in writing on every estimate and invoice. It must be agreed to before the work, not added after the fact.
Late fees only work when they are predictable, disclosed, and applied consistently. A policy that lives only in your head is unenforceable and tends to feel arbitrary to customers — which is the opposite of what late fees are supposed to do.
Pick a rate and grace period
The most common late-fee structure in U.S. small business is 1.5% per month (18% annualized) after a 10-day grace period. Some states cap the maximum rate — check your state's usury law before committing to a higher figure.
Lower rates (1% per month) are appropriate for recurring B2B customers where the relationship matters. Higher rates (the state-law maximum) are appropriate for one-off customers where the late fee is your only enforcement leverage.
Disclose, disclose, disclose
The fee must appear in three places: on the signed estimate, on the invoice itself (footer is fine), and in any written agreement or terms-of-service document. If you cannot point a customer at where the fee was disclosed in writing before they hired you, you cannot enforce it.
- On the estimate the customer signed
- On every invoice issued
- In your terms of service or written agreement
- In the body of any past-due reminder that applies the fee
Example late-fee clauses
Short version (invoice footer): 'Payment is due within 15 days. A late fee of 1.5% per month will be applied to balances unpaid after a 10-day grace period.'
Longer version (terms of service): 'Invoices are payable in U.S. dollars within fifteen (15) calendar days of the invoice date. Any balance remaining unpaid more than ten (10) calendar days after the due date will be subject to a late charge of 1.5% per month, or the maximum rate permitted by law, whichever is lower, until paid in full. Customer is responsible for any costs of collection, including reasonable attorney fees and court costs.'
Frequently asked questions
How much can I legally charge as a late fee?
Most states allow up to 1.5% per month (18% annualized). Some states cap it lower. Check your state's usury statute or consult a small-business attorney before exceeding 1.5%.
Can I charge a flat late fee instead of a percentage?
Yes — a flat fee (e.g., '$25 late fee after 10 days') is legal and easier for customers to understand. It works best on smaller invoices where 1.5% would be trivial.
Do I have to charge the late fee every month or just once?
Compounding monthly late fees are legal if disclosed, but many small businesses charge a single late fee to keep things simple and preserve relationships.
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Sources & further reading
Primary sources we consulted when writing and reviewing this guide.