Can You Legally Charge Interest on Overdue Invoices?

The answer is yes — in almost every country, including the United States, Nigeria, the United Kingdom, Canada, Australia, and most of the EU, you can legally charge interest on overdue invoices. However, you must follow specific rules around disclosure, contract terms, reasonable rates, and local laws to avoid penalties, disputes, or having the fees disallowed.

Is Charging Interest on Overdue Invoices Legal?

Yes — provided you meet these core conditions:

• The late fee policy is clearly disclosed in advance (in your proposal, contract, terms of service, or on the invoice itself)

• The interest rate is reasonable and does not violate usury (excessive interest) laws

• You comply with local contract law, consumer protection rules (especially B2C), and any specific late payment statutes

You cannot legally:

• Add interest retroactively without prior agreement

• Charge punitive or exorbitant rates (courts may strike them down)

• Apply fees in ways that violate consumer protection laws (more restrictive for B2C than B2B)

Legal Rules by Major Jurisdiction

United States

• No federal cap on commercial (B2B) late fees — governed by state usury laws and contract terms

• Common allowable range: 1–2% per month (12–24% annualized) if agreed in writing

• Consumer (B2C) transactions: stricter caps (often 10–18% annual) in many states

• Must be disclosed upfront — include in contract or invoice terms

• States like California, New York, and Texas have “reasonable” standards; excessive fees can be challenged

Nigeria

• No strict statutory cap on commercial late fees

• Interest must be reasonable and agreed upon in the contract (courts often accept 1–2% per month)

• For VAT-registered businesses, late fees can be charged but must be clearly stated and reasonable

• Consumer Protection Council guidelines protect against exploitative penalties in B2C

• Courts may reduce fees deemed “unconscionable” or punitive

United Kingdom

• Late Payment of Commercial Debts (Interest) Act 1998: automatic right to charge statutory interest (Bank of England base rate + 8%) on B2B overdue debts

• You can agree on a higher rate if reasonable and disclosed

• Small businesses can also claim reasonable debt recovery costs

• Must notify client of terms in advance

European Union

• Late Payment Directive: B2B late fees allowed at ECB rate + 8–10%

• Many countries add fixed compensation (€40–€100 per late invoice)

• Disclosure and reasonableness are still required

Other Common Jurisdictions

• Canada: Provincial contract law — reasonable rates allowed if agreed

• Australia: Contractual late fees permitted if not punitive

• India: Interest Act allows reasonable rates, which must be disclosed

Universal Rule:
Always include the late fee policy in writing (proposal, contract, or invoice terms) before work begins. Without prior agreement, courts or regulators may disallow the charges.

How Much Interest Can You Realistically & Legally Charge?

• Safe & common range: 1–1.5% per month (12–18% annualized) — rarely challenged

• Aggressive but often acceptable: 2% per month (24% annualized) — if clearly agreed

• Risky: >3% per month — may be ruled usurious or unconscionable

Many businesses also add a flat late fee (e.g., $25–$50 or ₦5,000–₦10,000 after 14 days) — psychologically effective and harder to dispute than high percentages.

Best practice: Start at 1.5% per month, plus a small flat fee after a grace period (e.g., interest begins 7 days after the due date).

Best Practices for Charging Interest Legally & Professionally

1. Disclose the Policy Upfront

   • Add to every proposal/contract: “Late payments will incur interest at 1.5% per month after the due date.”

   • Repeat on every invoice (in terms/footer)

2. Keep Rates Reasonable

   • 1–1.5% monthly is safe and widely accepted

   • Include a grace period (e.g., no interest for the first 7 days past due)

3. Document Agreement

   • Keep signed contracts, email confirmations, or proposal acceptances

   • Track invoice due dates and payment history

4. Apply Fairly & Politely

   • Send a friendly reminder before applying for interest

   • Waive fees occasionally for good long-term clients (builds loyalty)

   • Never surprise clients with retroactive charges

5. Automate the Clause

   • Use tools like GenerateInvoice.net to pre-add late fee wording to every invoice

How GenerateInvoice.net Makes Late Fees Easy

• Add your late fee policy once (in default terms/notes) — it appears automatically on every invoice

• Customize due dates and terms easily

• Track overdue status via auto-saved history (last 10 free)

• Shareable links let clients see terms clearly before they accept

Head to https://generateinvoice.net, pick a template, add your late fee clause in the terms section, set default due dates, and start protecting your cash flow legally and professionally.