What Is Interest on Late Payment?

Interest on late payment is a charge that builds up on an overdue invoice balance for every day or month it stays unpaid. The rate comes from your contract or payment terms, or in some countries from the law. It differs from a late fee, which is a one-off charge.

In the UK, a business can claim statutory interest when another business pays late. The rate is 8% plus the Bank of England base rate, charged as simple interest. It doesn't apply if your contract sets a different interest rate. The base rate you use is the one in force on 31 December for debts that become late from January to June, and on 30 June for debts that become late from July to December.

In the US there is no single federal rule for business invoices. The interest you can charge depends on your contract and on state law, and many states cap rates. State your rate on the quote, the contract and every invoice, for example "1.5% per month on overdue balances", so the client has agreed to it before the work starts.

Many small businesses state the interest term and rarely charge it. Mentioning it in a reminder can be enough to get the invoice paid. This page is general information, not legal advice. Check the rules where you and your client are based.