Glossary
Late Payment Interest
Late payment interest is a charge a creditor adds to an overdue invoice, calculated as a percentage of the unpaid balance for the time it remains past due.
Late payment interest, sometimes called a finance charge or service charge, compensates a seller for the time it goes without money it was owed. In business-to-business sales, the right to charge interest on overdue invoices usually comes from the contract, such as a signed credit application or terms and conditions that the customer agreed to before the sale. A rate printed only on an invoice, after the order was placed, may be harder to enforce if the customer never agreed to it.
Interest is typically stated as a monthly or annual rate that applies from the due date until payment. Whether a given rate is allowed depends on state law. Many states have usury statutes that cap interest rates, but the rules for commercial transactions and credit sales often differ from consumer rules, and some states exempt business transactions entirely or above certain amounts. Because these rules vary, creditors should have their rate reviewed for the states where they do business. If no rate was agreed, state law may still allow interest at a statutory rate as part of a court award.
A simple example: a fictional HVAC parts distributor, Coldwater Supply, has signed terms with a mechanical contractor that provide for interest of 1 percent per month on balances more than 30 days past due. An $8,000 invoice goes 90 days beyond its due date. Using simple interest, the charge is about $240 for those three months. Coldwater shows the interest separately on its statement so the principal balance stays clear.
Late payment interest matters to a creditor because it encourages customers to pay on time and offsets the cost of carrying overdue balances. It can also become a bargaining tool, since waiving accrued interest is a common concession in exchange for prompt payment of principal. The key is having the term in an agreement signed before the debt arose.
Example
Coldwater Supply's signed terms allow 1 percent monthly interest after the due date. An $8,000 invoice that is 90 days late accrues about $240 in simple interest.