Late Payment Interest
A late payment interest clause sets the interest, and any fixed compensation, that a customer owes when it pays an invoice after its due date.
What it does
Interest on late payment compensates the supplier for the cost of being paid late, and gives the customer a reason not to delay. The clause states the rate, how it accrues (usually daily from the due date until payment), and whether it applies automatically or only after a demand.
In the EU, the Late Payment Directive sets a statutory framework for business-to-business transactions. Key points, as implemented in national law: a supplier is entitled to statutory interest without a reminder once the payment period has passed; the statutory rate is the central bank reference rate plus at least eight percentage points; the supplier is also entitled to a fixed minimum sum of EUR 40 as compensation for recovery costs, plus reasonable further costs; and payment periods over 60 days are only permitted if expressly agreed and not grossly unfair to the creditor. Member states implement these rules with local variations, and the UK retains a similar regime.
Outside the EU, statutory late payment rights vary widely. In many places there is no statutory right, and the contract clause is the only basis for interest.
Example wording
If the Customer fails to pay any undisputed amount by the due date, the Supplier may charge interest on the overdue amount at the rate of eight (8) percentage points above the [central bank] base rate, accruing daily from the due date until payment in full, together with any fixed compensation for recovery costs to which the Supplier is entitled under applicable law.
Risks for SMBs
Rights that are never used. SMB suppliers rarely charge late payment interest to important customers for fear of damaging the relationship. That is a commercial choice, but the statutory right does not disappear because it is unused. Knowing the entitlement gives leverage in a conversation about an overdue invoice, even if interest is never actually invoiced.
Contractual rates below the statutory rate. Some customer templates set a low contractual rate, or exclude interest altogether. In the EU, a term that excludes interest on late payment is treated as grossly unfair and is not enforceable. A term setting a very low rate may be challengeable on the same basis. Jurisdiction-dependent, but worth knowing before accepting the customer’s paper.
“Disputed” invoices. Interest usually runs only on undisputed sums. A customer that disputes every invoice, however weakly, may avoid interest. A tight dispute process in the payment terms clause prevents this. See payment terms.
Compounding and accrual. Check whether interest is simple or compound, and whether it runs from the due date or from a demand. Daily simple interest from the due date is the usual position.
Cash flow, not interest. For most SMBs the real damage of late payment is cash flow, not the lost interest. Interest is a deterrent and a bargaining chip, not a fix. Shorter payment terms, deposits, and suspension rights matter more.
Common variants and negotiation points
- Rate. The EU statutory rate, reference rate plus eight points, is the natural middle ground in Europe. Higher contractual rates are unusual and may be challenged.
- Grace period. Some customers ask for interest to start only after a reminder or a short grace period. A reminder requirement weakens the supplier’s position and is not required by EU law.
- Recovery costs. Include the right to recover reasonable collection costs, including legal fees, in addition to the fixed statutory sum.
- Link to suspension and termination. Interest alone rarely changes behaviour. Pair it with a right to suspend services after notice and to terminate for persistent non-payment.
- Mutual application. Where the supplier may owe refunds or credits, ask for the same interest to apply to sums the supplier is late in paying.
Related clauses
- Payment terms: the due dates that interest runs from.
- Termination for cause: the exit for persistent non-payment.
- Notice: how reminders and demands must be sent.
- Price increase: the other clause that changes what is owed over time.
This page is general information about a common contract clause. It is not legal advice and does not account for your jurisdiction, industry, or the specific contract in front of you. Talk to a qualified lawyer before relying on it.
Tracking renewal dates, notice periods, and other contract obligations is what Trackado does.