How to charge interest on overdue invoices (and when you legally can)

Charging interest on overdue invoices compensates you for waiting and gives customers a reason to pay on time. Done properly, it is a normal commercial term. Done carelessly, it is unenforceable or even unlawful.

Can you legally charge interest?

In many places you can, if the customer agreed to it in advance and the rate is within the legal limit. In the US, limits are set state by state. In the UK, statutory late payment interest applies to business-to-business debts. Consumer transactions are more restricted everywhere. Check with an accountant or lawyer for your jurisdiction before relying on a rate.

Step 1: put it in your terms

Example: Overdue balances accrue interest at 1% per month (12% per year), calculated daily from the due date until paid, or the maximum rate permitted by law if lower.

Step 2: calculate it simply

Simple daily interest = outstanding balance × annual rate ÷ 365 × days overdue. For a $5,000 invoice at 12% per year, 30 days late: 5,000 × 0.12 ÷ 365 × 30 ≈ $49.32.

Step 3: invoice it separately

Add interest as a separate line or a separate invoice that references the original. Mixing it into the principal makes reconciliation harder and invites disputes.

Step 4: decide when to waive it

Interest is also a negotiating tool. Offering to waive accrued interest if the principal is paid by a set date often gets money moving faster than insisting on every cent.

Charging interest in accounting software

QuickBooks, Xero and similar tools offer finance-charge or late-fee settings that add charges automatically. Test the settings on one invoice before enabling them across your ledger.

Frequently asked questions

Can you legally charge interest on overdue invoices?

Often yes, if the customer agreed to it beforehand and the rate is within your jurisdiction's legal limit. Consumer debts are more regulated than business debts.

How much interest can I charge on an overdue invoice?

It depends on where you and your customer are. Many businesses use about 1% to 1.5% per month, capped at the legal maximum.

How do I calculate interest on an overdue invoice?

Multiply the balance by the annual rate, divide by 365, then multiply by the number of days overdue.