A contractor sends an invoice with "10% late fee per day" printed at the bottom. A supplier's terms say "$100 per day until paid in full." Whether you're the one charging it or the one staring at it, the question is the same: does that actually hold up?
Usually not — and the reason is arithmetic before it is law. A daily percentage looks small on an invoice and becomes absurd the moment you annualize it, which is exactly what a court and a usury statute both do.
The Math First
Multiply any daily rate by 365 to get the annual rate courts and statutes actually measure:
Scroll sideways to see all columns
| Invoice says | Annual equivalent | Realistic outcome |
|---|---|---|
| 0.05% per day | 18.25% per year | Standard and enforceable in most states |
| 0.5% per day | 182.5% per year | Over every state ceiling |
| 1% per day | 365% per year | Void as a penalty |
| 10% per day | 3,650% per year | Void, and not a close call |
Flat daily amounts convert the same way once expressed as a share of the invoice. $100 per day on a $3,000 invoice is 3.33% per day, or roughly 1,217% per year. The invoice never says that number, but that is the number being charged.
This is why a fee that "only" adds up over a few weeks still fails. A 10% daily fee turns a $3,000 invoice into a $6,000 invoice in ten days. No court reads that as compensation for the cost of waiting.
Two Separate Tests Have to Be Passed
People assume there's one rule. There are two, and a daily fee usually fails both independently.
1. The state ceiling on contract interest
Most states let commercial parties set whatever rate they write into the contract, but a meaningful minority impose a hard ceiling. Arkansas caps written-contract interest at 17% per year under Constitution Amendment 89. Louisiana caps conventional interest at 12% per year under La. R.S. 9:3500. Texas sets an 18% commercial ceiling. Even in the permissive states, "no ceiling once written" was never meant to bless 3,650%. Our late fee laws by state research covers the ceiling in 34 states.
2. The liquidated damages doctrine
This is the test most people have never heard of, and it is the one that kills daily fees even in states with no rate cap at all.
A late fee is only enforceable as liquidated damages — a reasonable advance estimate of the harm that late payment causes you. If it is designed to punish the late payer or squeeze them into paying, it is a penalty, and courts refuse to enforce penalties. Uniform Commercial Code §2-718 puts it directly: a term fixing unreasonably large liquidated damages is void as a penalty.
Courts generally ask two things:
- Was the actual harm from late payment difficult to calculate when the contract was made?
- Is the agreed amount reasonably related to the harm that could have been anticipated?
California codifies this at Civil Code §1671(b): in a non-consumer contract, a liquidated damages clause is valid unless the party challenging it proves it was unreasonable under the circumstances existing when the contract was made. That's a presumption in favor of the business that wrote the clause — and daily fees still lose, because the presumption isn't absolute. The California Supreme Court struck down a punitive charge on exactly this reasoning in Ridgley v. Topa Thrift & Loan Ass'n.
The practical takeaway cuts both ways. If you're charging: a modest, defensible rate is presumed valid, so you gain nothing by reaching. If you're being charged: the burden is on you, so "that seems excessive" isn't an argument — the annualized number is.
Don't call it a penalty in writing. Language matters here in a way that surprises people. A clause that describes the charge as a "penalty" for late payment invites a court to read it as exactly that. Standard drafting says the opposite explicitly: the amount is agreed as liquidated damages and not as a penalty.
Check a Daily Rate Against Your State
Enter the fee as the invoice states it. This annualizes it and compares it against the ceiling for written commercial contracts in the state whose law governs.
Daily Late Fee Checker
Covers the 34 states in our late fee law research. Informational only — not legal advice.
Annualization is the daily rate × 365, the simple-interest method statutes use. Enforceability also depends on whether the fee was agreed in writing before the work, so treat the verdict as a rate check rather than a ruling.
If You're the One Being Charged
Work through it in this order.
- Was it agreed in writing before the work? A late fee appearing for the first time on an invoice, with nothing in the contract, quote or accepted terms authorizing it, generally isn't enforceable — you never agreed to it. This is the fastest disposal of most aggressive daily fees.
- Annualize it. "3% per day" is a negotiating position; "1,095% per year" is the same fact in the language a court uses. Putting the annual number in writing changes the conversation immediately.
- Pay the principal. The underlying invoice is usually still owed even when the fee isn't. Withholding the principal because you dispute the fee converts a strong position into a weak one.
- Put the dispute in writing. State what you're paying, what you're disputing, and why — the annualized rate and the absence of a written agreement, if that applies.
If You're the One Charging
The uncomfortable truth is that an aggressive daily fee is usually worse for collection than a modest monthly one. An unenforceable clause gives the other side a reason to litigate instead of pay, and if a court voids it you may recover nothing rather than something. A defensible 1.5% monthly fee that survives is worth more than a 10% daily fee that doesn't.
If you want a fee that visibly accrues day by day — which is a reasonable thing to want, since it creates steady pressure — state a monthly or annual rate in the contract and compute it daily. Same daily accrual, same visible growth on a statement, but the rate a court measures is 18% rather than 3,650%.
A flat administrative fee alongside the interest is also commonly upheld, provided it's modest and tied to a real cost — the labor of chasing the payment. What fails is a flat fee large enough that it can only be read as leverage.
For the mechanics of applying and invoicing the fee, see how to calculate late fees on invoices, and how to handle late payments for the escalation sequence before it reaches this point.
One Case Where None of This Applies: Government Contracts
If your customer is a government agency, your invoice terms generally don't set the late payment interest at all — a prompt payment statute does.
At the federal level the Prompt Payment Act (31 U.S.C. §3901 et seq.) requires agencies to pay a proper invoice within a set period and provides that interest accrues automatically at a rate Treasury sets periodically, without you needing a late fee clause. Most states have their own prompt payment statutes for public contracts, with their own deadlines, rates and notice requirements, and those vary considerably. The practical consequence: a daily fee written into your terms is doubly ineffective against a public agency, while the statutory interest you're already entitled to is often overlooked. If you invoice government agencies, look up the specific statute for that jurisdiction rather than relying on your contract language.
Need to work out what's actually owed on an overdue invoice? The late fee calculator handles interest, flat fees, or both, and shows the daily accrual.
Open Late Fee Calculator →Frequently Asked Questions
Is a 10% per day late fee legal on an invoice?
Almost certainly not. A 10% per day charge annualizes to 3,650% per year, which is far above every state commercial interest ceiling and far beyond any amount a court would accept as a reasonable estimate of the harm caused by a late payment. It has to survive two separate legal tests and it fails both: the state usury or maximum contract rate ceiling, and the liquidated damages doctrine, under which a charge designed to punish rather than compensate is void as a penalty. UCC §2-718 states plainly that a term fixing unreasonably large liquidated damages is void as a penalty. A daily percentage charge on an invoice is one of the clearest examples of that.
How do I convert a daily late fee into an annual rate?
Multiply the daily percentage by 365. A charge of 0.05% per day is about 18% per year, the standard commercial figure. 1% per day is 365% per year. 10% per day is 3,650% per year. Flat daily amounts convert the same way once you express them as a percentage of the invoice: $50 per day on a $2,000 invoice is 2.5% per day, or roughly 912% per year. The conversion matters because usury statutes and courts both measure the rate annually, no matter how the invoice words it.
What is the difference between an enforceable late fee and an unenforceable penalty?
An enforceable late fee is liquidated damages — a reasonable advance estimate of the harm that late payment causes. An unenforceable penalty is an amount designed to punish the late payer or pressure them into paying. Courts generally ask two questions: was the actual harm from late payment difficult to calculate when the contract was made, and is the agreed amount reasonably related to the harm that could have been anticipated. In California this is codified at Civil Code §1671(b), which makes a liquidated damages clause in a non-consumer contract valid unless the party challenging it proves it was unreasonable when the contract was made. The California Supreme Court struck down a punitive charge on this basis in Ridgley v. Topa Thrift & Loan Ass'n.
A vendor is charging me a daily late fee. Do I have to pay it?
Start with whether it was in a written agreement you accepted before the work was done. A late fee that appears for the first time on an invoice, with nothing in the underlying contract or quote authorizing it, generally isn't enforceable, because you never agreed to it. If it was in the contract, the next question is the rate: annualize it and compare it against your state's ceiling for written commercial contracts. The underlying invoice amount is usually still owed even when the fee is not, so disputing the fee is not a reason to withhold the principal.
What late fee rate is actually safe to charge?
For B2B invoices, 1.5% per month (18% per year) is the figure most widely enforced across US jurisdictions and it comfortably passes the reasonableness test. A handful of states sit below it: Arkansas caps written-contract interest at 17% per year, so about 1.4% per month is safer there, and Louisiana caps conventional interest at 12% per year, or 1% per month. Texas sets an 18% commercial ceiling, so 1.5% per month is exactly at the line and 2% is over it. If you want a fee that accrues visibly by the day, state a monthly or annual rate in the contract and compute it daily, rather than stating a daily percentage.
The short version: multiply by 365 before you write the clause or before you pay the fee. Almost every argument about daily late fees ends the moment someone does that arithmetic out loud.
This page is general information for US business-to-business invoicing, not legal advice, and does not create an attorney-client relationship. Consumer transactions, residential leases and government contracts are governed by different rules than the ones described here. State law varies and changes — verify the current ceiling in the state governing your contract, and consult a licensed attorney about a specific dispute.