What is a late fee?

A late fee is a charge assessed when payment is not received by the due date, designed to encourage timely payment and compensate for collection costs. For professional service firms, late fees incentivize prompt payment but must be disclosed in advance and comply with regulations.

Key characteristics

• Charge for overdue payment

• Encourages timely payment

• Must be disclosed upfront

• Subject to state limits

• Typically 1% to 1.5% monthly

• May strain client relationships

Why it matters for professional service firms

Late fees encourage timely payment and compensate for delayed cash flow. However, enforcement affects client relationships. Professional service firms should include late fee terms in engagement letters, apply them consistently, and balance enforcement with relationship management.

Real-world example

Kevin's engagement letters included: 1.5% monthly late fee on balances over 30 days. The client paid 45 days late on a $12,000 invoice. Late fee: $180 (1.5% times $12,000 times 1 month). Fee applied and communicated. Client paid, including the fee, and improved subsequent payment timing. Consistent enforcement established payment expectations.