Real answers about charging interest on overdue invoices, calculating carrying costs, and deciding between flat fees and per-day interest.
Yes, if your contract includes a late-payment clause. Many states cap the rate through usury laws. Common contract language is 1.5% per month (18% APR) on balances over 30 days.
Without a contract clause, you can claim “reasonable” interest but it is harder to collect and often requires small claims court. The safest move: add a late-payment clause to every contract before work starts.
1–2% per month (12–24% APR) is common in construction. Some states have prompt-payment acts that set statutory rates for public and private projects.
Federal projects fall under the Prompt Payment Act at 4.5–10% depending on the current Treasury rate. Check your state’s specific prompt-payment statute before setting your rate.
Principal × annual rate × (days past due / 365), plus your daily cost of capital.
Example: a $15,000 invoice at 18% APR, 60 days late = $443 in interest. Your carrying cost also includes the line of credit interest you are paying to cover the gap while waiting for payment.
(Invoice amount × annual rate) / 365
Example: $15,000 × 18% / 365 = $7.40 per day. After 60 days that is $444. Add your own line of credit cost if you are borrowing to cover the gap.
Knowing the daily cost helps you decide whether to pursue collection aggressively or accept a payment plan. At $7.40/day, a 90-day delay costs $666—money that comes straight out of your margin.
Both work, but they serve different purposes. A flat fee ($25–50) gets attention faster than per-day interest because it is immediately visible on the invoice. Per-day interest grows silently and only becomes painful after weeks.
Best approach: flat fee + interest after 30 days. The flat fee creates urgency. The threat of compounding interest motivates payment better than a one-time fee. Include both in your contract’s payment terms.