How to Change Interest on Overdue Invoices

To change interest on overdue invoices, go into your invoicing or accounting system settings, open the section for late fees or finance charges, and update the percentage rate, flat fee, or grace period. 

For example, if you currently charge 1% monthly interest after 10 days, you can increase it to 2% or add a flat $25 late fee. Once updated, save the changes so all future invoices apply the new policy. Don’t forget to notify customers about the adjustment and, if needed, reissue existing overdue invoices with the new interest added.

Review Your Current Late Payment Policy

Before making any changes, assess your existing terms:

• What is the current interest rate? (e.g., 1.5% monthly, 18% annually)
• When does it start applying? (immediately after due date, after a grace period)
• Are there flat fees in addition to interest?

Example: If you currently charge 2% monthly interest after a 10-day grace period, consider whether you want to lower it for customer retention or increase it to discourage late payments.

Decide on a New Interest Rate

Choose an updated rate or policy that balances fairness with protecting your cash flow.

• Lowering the rate: Can make customers more likely to pay without resentment.
• Increasing the rate: Sends a clear message that late payments are costly.
• Switching to flat late fees: Instead of a percentage, some businesses apply a fixed charge (e.g., $25 per overdue invoice).

Tip: Always check local regulations, as some regions limit the maximum interest you can legally charge on overdue invoices.

Update Your Invoicing System Settings

Most accounting or invoicing software allows you to set interest terms. Here’s how you typically change them:

1. Log into your invoicing or accounting software.
2. Navigate to invoice settings or payment terms.
3. Find the section for late fees or interest charges.
4. Update the percentage rate, flat fee, or grace period to reflect your new policy.
5. Save the changes, ensuring they apply to all new invoices moving forward.

Example: If you’re switching from 1% per month to 1.5%, enter “1.5%” in the interest rate field and adjust the grace period if necessary.

Communicate Changes to Customers

Notify your customers in advance to avoid disputes.

• Send a formal email or letter outlining the new terms.
• Include effective dates (e.g., “Effective November 1, overdue invoices will accrue 2% monthly interest”).
• Update contracts and agreements so new customers see the updated terms.

Sample email:

Dear [Customer Name],

We’re updating our late payment policy effective [date]. Overdue invoices will now incur a [new rate]% monthly interest charge after [X] days. This ensures fairness and helps us continue delivering consistent service. Please reach out with any questions.

Thank you,

[Your Business Name]

Apply Interest to Existing Overdue Invoices

If invoices are already overdue, you may need to manually apply the new interest rate or late fee. Here’s how:

• Recalculate the outstanding balance using the updated rate.
• Issue an updated invoice with the new interest included.
• Clearly label the added charges as “Late Fee” or “Interest on Overdue Balance” to avoid confusion.

Example:

• Original overdue balance: $1,000
• Old interest: 1% ($10 per month)
• New interest: 2% ($20 per month)
• Total due after adjustment: $1,020

Monitor and Enforce the Policy Consistently

Consistency is what makes your late payment policy effective.

• Run monthly reports to identify overdue invoices.
• Apply interest automatically if your system supports it, or manually if needed.
• Follow up with reminders and include updated balances.

This way, you reinforce to customers that late payments will always cost more, motivating them to pay on time.

Bonus Tip: Automate Payments with DepositFix

Chasing overdue invoices becomes much easier if customers can pay you quickly and conveniently. With DepositFix, you can integrate secure payment options directly into your invoicing process, including credit card and ACH payments. When you make it effortless for customers to pay on time, you reduce the need to rely heavily on interest charges and improve overall cash flow.