Late Payment Interest Clauses: What Ontario Businesses Can Charge on Overdue Invoices

Late-paying customers are one of the most common frustrations for Ontario small businesses, and a clearly worded late payment interest clause is one of the simplest tools for addressing it. Charging interest on an overdue invoice isn't automatic, though — and businesses that never set a rate, or that set one carelessly, often find they have less leverage than they assumed.

This article explains, in plain language, how to build an enforceable interest clause and what happens when a contract doesn't have one.

Why a Written Interest Clause Matters

If your contract or terms of sale are silent on what happens when a customer pays late, you don't automatically get to charge whatever interest rate feels fair after the fact. Courts and default legal rules fill that gap in ways that may be less favourable — or simply less certain — than a rate you set clearly up front. A written clause gives you:

• Certainty. Both sides know in advance what a late payment will cost.
• Leverage in collection conversations. A specific, contractually agreed interest charge is easier to invoice and easier to justify than an ad hoc late fee invented after the fact.
• A documented basis for pursuing the debt, including any accumulated interest, if the account ends up in a formal collection process or before a court.

What Belongs in the Clause

A workable late payment interest clause should specify:

1. The trigger. When exactly does an invoice become "overdue" — a fixed number of days after the invoice date, after delivery, or after a specific due date stated on the invoice?
2. The rate. State the annual interest rate clearly, and specify whether it's simple or compounding, and how often it compounds if applicable.
3. How it's calculated. Spell out whether interest accrues on the full unpaid balance, and from what date.
4. Any grace period. Some businesses build in a short grace period before interest starts running, as a goodwill gesture; others don't. Either is fine as long as it's stated.
5. What else is recoverable. Many clauses also address recovery of reasonable collection costs or legal fees incurred in recovering an overdue amount, which is a separate issue from interest.

A drafting caution on the rate itself

Canadian law places an overall ceiling on how high an interest rate charged in connection with an advance of credit can go — this ceiling exists regardless of what a contract says, and a rate that pushes into that territory (which is more of a risk with compounding, fees, or short payment periods than with a straightforward late-invoice interest rate) can put the whole clause at risk. Because how this ceiling is calculated is technical and the details matter, have any interest clause reviewed by a lawyer rather than picking a number that "sounds normal" for your industry.

What Happens If Your Contract Says Nothing About Interest

If you never set an interest rate and a customer's invoice goes unpaid, you aren't necessarily out of options — you may still be able to pursue the underlying debt, and a default legislated rate can sometimes apply to amounts awarded through a court process. But relying on a default rate, rather than a rate you chose and disclosed up front, generally means less certainty and less leverage in day-to-day collection efforts. It's a fallback, not a substitute for a clear clause.

Practical Steps for Getting Paid Faster

• State your payment terms and interest clause on every quote, order confirmation, and invoice — not just buried in a master contract the customer may not have handy.
• Follow up promptly once an invoice becomes overdue; the earlier you engage, the more likely you'll resolve it without escalation.
• Apply the clause consistently. Charging interest on some overdue customers and not others, with no clear policy, can undermine your position if a dispute ever gets contested.
• Keep clean records of invoice dates, due dates, and any partial payments — this matters if the account needs to move to collections or litigation.
• Know when it's time to involve a lawyer. For a persistently unpaid, larger account, a formal demand letter is often more effective than continued informal follow-up.

Frequently asked questions