Late charges: Overview, definition and example
What are late charges?
Late charges are fees that are applied when a payment is made after the agreed-upon due date. These charges are usually outlined in a contract to encourage timely payment and to compensate the payee for the inconvenience or additional costs caused by the delay. Late charges can be a fixed amount or a percentage of the overdue payment.
Why are late charges important?
Late charges are important because they help maintain the flow of payments and ensure that businesses get paid on time. For the payee, it provides a way to recover some of the costs associated with delayed payments. For the payer, late charges act as a deterrent to prevent procrastination and encourage timely payments.
Understanding late charges through an example
Imagine a small business that offers services to clients with a payment due date of the 1st of each month. The contract states that if the client fails to pay by this date, a late charge of 5% of the overdue amount will be applied.
If a client doesn’t pay their invoice on time, the late charge is added to the amount owed. For example, if the client owes $1,000 and is 10 days late, the business can add a late charge of $50 to the bill, bringing the total due to $1,050.
In another case, a vendor might have a contract with a company that imposes a flat $25 late fee for each late payment. Even if the overdue amount is small, the late charge still applies to incentivize timely payment.
An example of a late charges clause
Here’s how a late charges clause might look in a contract:
"If payment is not received within 10 days of the due date, a late charge of 5% of the overdue amount will be added to the balance. This charge will be assessed monthly until the outstanding balance is paid in full."
Conclusion
Late charges are a practical way to enforce payment deadlines and ensure that businesses are compensated for delays. By clearly outlining the terms in a contract, both parties know what to expect if a payment is late. Understanding how late charges work helps businesses maintain cash flow and encourage clients to pay on time.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.