What is a finance charge?

A finance charge is interest or fees assessed on unpaid balances over time, compensating the creditor for extended payment terms or late payment. For professional service firms, finance charges on overdue invoices recover the cost of financing client receivables.

Key characteristics

• Interest on the unpaid balance

• Accrues over time

• Must be disclosed

• Subject to usury laws

• Different from the late fee

• Stated as an annual rate

Why it matters for professional service firms

Finance charges compensate for the time value of money when clients pay late. They must be disclosed and comply with regulations. Professional service firms should include finance charge terms in agreements and apply them to encourage timely payment.

Real-world example

Lisa's terms included 18% annual finance charge on balances over 60 days. The client's $15,000 balance reached 90 days. Finance charge: $15,000 times 18% times (30 days / 365 days) equals $222. Charge applied monthly until paid—terms disclosed in the engagement letter satisfied disclosure requirements. Finance charges recovered the cost of extended financing.