I'm not a lawyer, but in my contract my attorney specified an interest rate of 1.5% per month for overdue invoices. That at first seemed absurdly low to me - I wasn't dealing with thousands of receivables. This was probably my only client, and that percentage rate was unacceptably painless for a defaulting client.
However, he said that there's a legal limit (in the US?) for interest rates you can apply to an invoice. Does anyone know the validity of this?
The legal concept in called usury, and it varies by state. New York prohibits interest in excess of 30%.
States where credit cards are issued from have no usury -- Delaware, South Dakota, Utah, etc. States where you see retail payday lenders, "title loans", etc generally have high usury rates.
You need to be careful, because application of the law varies by state. For example, if someone is able to sue you under New York law, a judge can void the entire debt. Also, serving members of the military can have their interest obligation limited to 6% in many circumstances.
Generally speaking, a late fee should be an incentive for prompt payment, not a punitive measure. I would refuse to sign off on any contract with a vendor that such a capricious and draconian late payment policy. If minor delays in payment are a huge problem, deal with the issue up front and collect an upfront payment before commencing work. Sneaking in some excessive (and legally dubious) penalty is not good business.
1) Penalties for late payments are almost always governed by state contract law, not usury laws.
2) A strict limit like 1.5% strikes me as odd, since in many similar cases judges pull in all kinds of "fairness" questions, like what the market is like, and how much it would burden one party to comply with the rate / go without payment. So maybe the Lawyer was saying, "this is as much as I know I can get from a judge, so even though we might be able to squeak out another half percent, I'm going to call this a 'limit' so it's simpler," OR and this is a big OR, your jurisdiction has just stipulated this rate for your industry. States are wacky, who knows.
I have no idea if this is a law, but 1.5% per month is about 20% pa. I think that anything over 20%-30% starts to fall into the classification of "predatory lending" or similarly frowned upon practices.
As I said, no idea about laws but I wouldn't be surprised if this is against various industry standards.
However, he said that there's a legal limit (in the US?) for interest rates you can apply to an invoice. Does anyone know the validity of this?