Agree it before you need it
The term belongs in the engagement letter or the quote, and then on every invoice. A fee that first appears on a reminder is a new condition invented after the fact, and a client who declines to pay it is usually right.
Word it so it can be applied
- The rate, and whether it is monthly or annual
- What it is charged on — the overdue amount, not the original total
- When it starts — the day after the due date, or after a stated grace period
- Whether it compounds, which for most small businesses it should not
Choose a rate you can defend
The point of the fee is to move you up the payment queue, not to earn interest. A rate that looks punitive invites a negotiation about the whole invoice, and some states cap what may be charged to consumers — so check your own state's rules before you set one.
Applying it is a decision, not an automatic process
Having the term is what gives you the choice. Waiving the fee for a client who calls to explain a delay costs you nothing and buys goodwill; waiving it silently, every time, teaches everyone that the term is decorative.
Common questions
- Can I charge a late fee if it was not on the invoice?
- In practice, no. Without prior agreement you are proposing a new term after the fact, and a client can simply decline. Put it on the engagement letter and every invoice from the start.
- Should the fee be a percentage or a flat amount?
- A percentage of the overdue balance scales with the risk and reads as standard practice. A flat fee on a small invoice can look disproportionate, which is exactly when a client disputes it.
- Does a late fee hurt the relationship?
- Announced in advance and applied consistently, it rarely does — it is a term of business. Applied by surprise, it does, because it reads as a penalty rather than a policy.