A late fee is either a flat charge or interest accruing on an overdue balance. Its purpose is compensatory — covering the cost of not having money you were owed — rather than punitive, and that distinction decides whether it survives a challenge.
Where it comes from varies. In the United States it is a contractual term, constrained by state usury limits. In the UK and across the EU, statutory regimes give business-to-business creditors a right to interest and fixed compensation automatically, whether or not the contract mentions it.
Why It Matters
The most common mistake is announcing the fee on the overdue invoice itself. Outside the statutory regimes, a term introduced after the agreement was struck is not part of it, so the fee is a request rather than a right. Equally common is the opposite error: UK and EU suppliers negotiating hard for a late fee clause while overlooking a statutory entitlement they already hold, which is often stronger than the clause they are asking for.
Example
Terms agreed up front read: "Invoices unpaid 30 days after the invoice date accrue interest at 1.5% per month on the outstanding balance, calculated daily from the due date, after a 5-day grace period." Both sides can compute the same figure, and the grace period absorbs ordinary bank timing.
Frequently Asked Questions
How much can I charge?
It depends on jurisdiction. UK statutory interest is the Bank of England base rate plus 8 percentage points with tiered fixed compensation; the EU Directive sets a floor of the ECB reference rate plus 8 points plus €40. In the US, state usury caps govern and 1–1.5% per month is convention rather than a safe harbour.
Will charging late fees damage the relationship?
Less than inconsistency does. Charging reliably and then waiving explicitly as a goodwill gesture establishes that your terms are real while preserving the relationship — and is worth more than never raising it.