Late payment fees

How a late fee is worked out

Count the days from the due date to the day you're calculating through, take off any grace period, and if anything is left the fee applies. A one-off percentage is the balance times the rate. A flat fee is the flat fee. A monthly charge is the rate times the number of months overdue.

Say a 2,000 invoice is 3 months overdue on terms of 1.5% a month: 2,000 × 1.5% × 3 = 90. The same invoice on a one-off 5% is 100, and on a flat 40 it's 40. The calculator shows all three beside its answer.

The calculator's monthly charge is not compounded

Every month charges the rate on the original balance. It never charges on the balance with last month's fee already added, so 3 months at 1.5% on 2,000 is 90, not 91.36. Compounding a late fee is a different agreement and usually says so in different words.

I'd leave compounding out unless your terms ask for it. Compounding without being asked would overstate what you're owed, and an overstated fee is likely to be disputed, which delays payment of the whole invoice.

Months, not 30-day blocks

Terms say "per month", so months are what the calculator counts. For example, 15 January to 15 February is 1 month whatever February's length. An invoice due on the 31st is treated as a full month on the 28th or 29th of February, because that's as far as the month goes. Counting it as nothing would give every invoice dated at a month end a free period.

On the calculator, Each month started counts a part-month as a whole one, which is what "per month or part thereof" means. Only full months waits for the month to complete. The difference on a single invoice can be a whole period, so I recommend checking which one your terms say before you raise the fee with the client.

A grace period is not the same as a longer term

A grace period delays the fee without moving the due date. The invoice is still late from the due date, which matters for a payment history, for a statement and for what you say in the reminder. Nothing is charged until the grace has run out. Say you allow 7 days of grace on an invoice due on the 1st. The fee starts on the 9th: the 8th is the 7th and last day of grace, and being 7 days late is not yet more than 7 days late.

Late fee or interest

Fees and interest often get the same name. A late fee is a charge for being late, usually flat or a single percentage. Interest accrues on the outstanding amount for as long as it's outstanding, and in many countries a statutory rate applies to commercial invoices whether or not the contract mentions one.

The monthly method described here behaves like simple interest. However, it says nothing about any statutory rate, so I recommend looking that up where you invoice.