For most overdue invoices, businesses charge somewhere between 1% and 2% per month, but how much interest you can charge on overdue invoices depends on two things: what your written agreement with the client says, and what your state’s laws allow. A contract clause gives you the strongest ground to stand on. Without one, you’re generally capped at your state’s default legal rate, which usually runs from 5% to 15% per year.
What Your Contract Lets You Charge
The cleanest way to charge interest is to put it in writing before any work starts. A clause in your contract, proposal, or terms of service that names a due date and a late payment rate gives you a clear legal basis. This is your contractual rate, and it holds up far better than trying to add interest after the fact.
The language doesn’t need to be formal. “Invoices are due within 30 days. A late payment charge of 1.5% per month applies to balances not paid by the due date” does the job. What matters is that the rate is stated, the deadline is clear, and the client agreed to it before the work began. Without that, a client has a reasonable argument that they never consented to interest, and collection gets harder.
The rate you pick still has to stay within your state’s legal ceiling. Writing 5% per month into your contract won’t make it enforceable just because the client signed. If your rate exceeds the state maximum, a court will typically knock it down to the legal limit or void the interest altogether.
What You Can Charge Without a Contract
If your agreement is silent on late fees or interest, you may still be able to charge interest, but only at your state’s default statutory rate (sometimes called the “legal rate of interest”). Every state sets one to cover situations where the parties didn’t agree on a number, and these rates are generally lower than what you could negotiate.
Statutory rates across the country range from 5% to 15% per year. Alabama, Texas, and Pennsylvania set theirs at 6%. Arizona, California, and Indiana use 10%. Florida, Idaho, and Washington go to 12%, and some states reach 15%. A few tie their rate to a benchmark like the Federal Reserve discount rate, so the number moves. To find yours, search for your state’s name plus “statutory interest rate” or “legal rate of interest.”
The gap between a typical contractual rate of 1.5% per month (18% annualized) and a statutory rate of 6% per year is large. On a $5,000 invoice that’s 60 days overdue, the contractual rate produces about $150 in interest; the statutory rate at 6% yields roughly $49. That difference alone is a good reason to include a late payment clause in every set of terms you use.
The State Usury Ceiling
Every state also has a ceiling on how much interest you can charge in any transaction, whether or not there’s a contract. These caps, called usury laws, exist to prevent exploitative rates. They vary widely and depend on the type of transaction, the amount involved, and whether the debtor is a consumer or a business.
General usury limits range from around 5% to as high as 45% across states, with 10% being a common midpoint. The number that applies to your situation depends on the category the transaction falls into. A state may allow 25% on a small consumer loan but cap commercial invoice interest at 12%, or the other way around. A handful of states have no general usury ceiling and rely on broader unconscionability standards to police extreme rates.
Going over your state’s usury limit carries real consequences. Depending on the state, penalties range from forfeiting all interest on the debt to owing the debtor damages. Some states treat it as a criminal offense. Look up your state’s specific usury statute and keep your rate well within it.
Business Clients Versus Consumer Clients
Whether your client is another business or an individual consumer changes the rules significantly. Many states either exempt commercial transactions from their usury caps or set much higher ceilings for them. At least nine states, including Virginia, South Carolina, and Nevada, impose no usury limit at all on debts between businesses. Others lift the cap once the debt passes a certain dollar amount.
Consumer debts are tighter. Under the Fair Debt Collection Practices Act, a debt collector cannot add interest, fees, or charges to a consumer debt unless those amounts are specifically authorized by the original agreement or permitted by state law.1Federal Trade Commission. Fair Debt Collection Practices Act Text Federal Regulation F says the same thing: any amount collected, including interest and fees, must be expressly authorized by the agreement creating the debt or permitted by law.2eCFR. Part 1006 Debt Collection Practices (Regulation F)
The practical result: if you bill individual consumers, your contract must include a specific late payment clause. Adding interest after the fact to a consumer who never agreed to it is legally risky and, in many states, unenforceable.
Flat Late Fees as an Alternative
You’re not stuck with percentage-based interest. Many businesses use a flat late fee instead, and some combine the two. A flat fee of $25 to $50 per overdue period is common for small invoices where percentage interest would amount to almost nothing. On a $200 invoice a month late, 1.5% interest is $3, which doesn’t motivate anyone to pay. A $25 flat fee sends a clearer signal.
Some states cap flat late fees at specific dollar amounts. Others have no maximum but require that the fee be reasonable and proportional to the debt. Like interest, flat fees are much more enforceable when they appear in your written agreement before the sale or service. A fee that first appears on a past-due notice is easy for a client to dispute.
You can layer both: a one-time flat fee when the invoice becomes overdue, plus ongoing percentage interest for each month it stays unpaid. Keep the combined charges within your state’s limits and disclose all of it upfront in your terms.
How to Calculate Interest on an Overdue Invoice
The standard calculation uses three numbers: the unpaid invoice amount, the annual interest rate, and the number of days overdue. Divide the annual rate by 365 to get a daily rate, then multiply by the overdue days.
The formula: Invoice Amount × (Annual Rate ÷ 365) × Days Past Due
Say a client owes $2,000 on an invoice that’s 45 days past due at an agreed rate of 10% annually. The math: $2,000 × (0.10 ÷ 365) × 45 = $24.66 in accrued interest. The daily charge is about 55 cents, which builds gradually the longer the payment sits. Whatever day-count method you use, name it in your contract so there’s no ambiguity later.
When a Client Sends a Partial Payment
When a client sends a check that doesn’t cover the full amount, the default U.S. rule is that the payment applies to accrued interest first, with the remainder reducing the principal. If a client owes $2,000 in principal plus $50 in accrued interest and sends $500, the first $50 covers the interest and the remaining $450 drops the principal to $1,550. Interest then continues to accrue on the new, lower balance.
This default can be changed by agreement. If your contract says partial payments reduce principal first, that controls. Neither is inherently better, but the interest-first rule favors the creditor because the principal stays higher for longer. If you have a preference, put it in your terms.
Federal Government Contracts
One boundary worth knowing: if you do work for a federal agency, you don’t set the rate. The Prompt Payment Act requires the government to pay interest on late invoices at a rate set by the Treasury Department, which adjusts every six months. For the first half of 2026, that rate is 4.125% per year.3Federal Register. Prompt Payment Interest Rate; Contract Disputes Act Federal agencies also use a 360-day year rather than 365, which slightly increases the effective daily rate.4Bureau of the Fiscal Service. Prompt Payment: Interest Calculator It applies automatically; you don’t need to negotiate it into your contract.
Collecting When a Client Refuses to Pay the Interest
If a client pays the principal but refuses to pay the accrued interest, your options depend on the amount and whether you have a written agreement. Small claims court is available in every state for low-dollar disputes, and filing fees are minimal. You can typically sue for both unpaid principal and accrued interest, and in most states the interest doesn’t count toward the jurisdictional dollar limit.
For larger amounts, a demand letter from an attorney often resolves the dispute without litigation. The letter should reference the specific contract clause authorizing the interest, show the calculation, and state the total owed. Most clients who ignore a polite email will take a lawyer’s letter seriously.
The strongest position is the one where you had clear terms from the start, sent timely reminders, documented everything, and charged a rate that’s plainly reasonable. Where most interest disputes fall apart is at the first step: there was no written agreement, or it was vague, and the client argues they never consented. Getting the paperwork right before work begins is worth more than any collection tactic after the fact.