How Much Can I Charge For Late Fees In New Zealand?
Updated on July 3 2024. This post has been updated to include new details. Originally posted in February 2022.
Nearly half of all invoices sent by New Zealand businesses are paid late. That’s a worrying figure for any company, particularly small-to-medium enterprises (SMEs) that rely on a healthy cash flow.
Research indicates that on any day, 50% of kiwi businesses are owed NZD $7,000 or more.
In fact, late payments are so common that you might have even accepted it as a frustrating yet unavoidable part of trading. Well, thankfully, that’s not the case.
Late fees can be a powerful motivator to encourage clients to pay on time. Here’s everything you need to know.
Please note that the information found in this blog serves to inform but does not constitute legal advice. For information specific to your industry, we recommend contacting a legal professional.
Is it legal to charge late fees in NZ?
Yes, businesses in New Zealand can charge late fees on overdue invoices by applying interest or a fixed penalty. However, there are a few specific legal guidelines you need to follow.
While there isn’t anything specifically covered in the law that outlines what you are entitled to charge, the onus is on you to ensure it is considered “reasonable”.
Important: In New Zealand, late payment fees should not be exploitative and should simply provide an added encouragement for clients to pay on time.
As per the Credit Contract and Consumer Finance Act (CCCFA), you should not charge more than 0.8% of the unpaid balance per day and default fees for late payments should be below NZD $30.
Keep in mind that although it’s entirely legal to charge a late fee, it’s only enforceable if certain criteria are met.
Important: Your client is only obligated to pay the additional fee if they’ve signed a contract that clearly lays out your payment terms.
To ensure that your clients are encouraged to pay their invoices on time and in full, follow best practices when setting out the payment terms in your contract.
What is the best practice for charging late fees?
Businesses throughout New Zealand add late fees to unpaid invoices using a variety of techniques.
For smaller clients, you might prefer to use a penalty fee model, adding a fixed amount to the invoice after a certain period of non-payment.
For larger clients, you might use an interest-added model, where a percentage is charged on the balance. You may even use a combination of the two.
Regardless of how you choose to charge late fees, there are a few best practices to adhere to:
Including late fees in your contract terms
First and foremost, in order to charge a late fee, you must have your payment terms agreed with your client.
The easiest way to do this is to include the relevant information in your contract when onboarding new clients.
We've written some examples of late fee policy wording you can use in your contract terms.
For existing clients, simply send over the new terms and ask them to agree, or incorporate the terms into your ordering process.
Make sure you include a grace period
In New Zealand, getting in touch with your client before entering late payment territory is the best practice. Giving your client a call and a nudge is often all that’s needed to secure payment.
Short invoicing periods are fairly commonplace in New Zealand, so there’s no need to wait 30 days before chasing payment. Every business can set its own terms, but here’s a suggestion to get you started.
- Day 0 - Invoice is sent with a 14-day payment window.
- Day 15 - Invoice hasn’t been paid - call the client to chase.
- Day 16/20 - Grace period
- Day 21 - Payment still not received - late fee charged.
The grace period may seem frustrating when your client is already behind on their invoice. Still, it shows your clients that you are reasonable and ensures you don’t look unprofessional if there is a genuine reason behind the delay.
Be prepared to waive the first one
The first time you charge a late payment fee, it’s likely that your client will get in touch. After all, no one likes being charged additional fees.
At this point, assuming it’s the first time they’ve been charged a late fee, and they’re apologetic about the delay, you might want to reverse the charge.
Nine times out of ten, that first close call is enough to ensure your client’s future invoices are paid on time.
How much can I charge for late fees in New Zealand?
Now that we’ve covered best practices for charging late fees let’s look at the figures in more detail. How much can you charge? How do you work out the interest fee? What level of fee is considered “reasonable” in New Zealand?
Tip: It’s important to keep in mind that late payment fees should serve as a payment aid to get paid quicker, not as a new revenue stream.
The reason for adding late fees to unpaid invoices isn’t to boost your income but to motivate your clients to pay on time. They shouldn’t be small enough to be insignificant, but they shouldn’t raise eyebrows either. Aim for somewhere in the middle.
How much should I charge on low invoice balances
If you are dealing with overdue invoices for amounts lower than NZD $1000, it’s probably not worth your while charging interest as a deterrent, charging a aixed late payment fee of approximately NZD $20 per invoice.
How much should I charge on high invoice balances
If you are invoicing for larger amounts at NZD $1000+, interest-based fees are the better way to encourage prompt payment. A rate of anywhere between 1.5 to 4% of the total invoice amount (per month) is normal.
There are late fee calculators you can use to work out daily interest rates on balance owed but let’s face it, that’s a very manual process. In fact, the reason that most SMEs don’t charge late fees is precisely because of how much extra work is involved. That is, until now.
How can I set up and automate late fees?
Paidnice will automatically detect when Xero invoices go overdue, and issue your customers a penalty, either a late fee or an interest charge, and either add this to your existing invoice as a line item, or issue a new invoice as a penalty.
Charging late fees is one of the most effective ways to encourage prompt payments. But it’s traditionally meant a lot of extra admin. With already over-stretched accounts receivable departments, many SMEs haven’t had the time or resources to bring late payment fees into their invoicing procedures.
With over 3 million subscribers globally, Xero is New Zealand’s most popular accounts receivable software provider. However, it has one rather large pain point: it doesn’t have late fee automation. That’s where we come in.
With the option to add fixed and percentage-based late fees, customisable by client, Paidnice makes it easy to get paid on time. Our software integrates seamlessly with Xero and gives you complete control, allowing you to set the parameters that suit your business.
Our clients get paid 40% faster than those without Paidnice, making it an essential addition to your accounts receivable platform. Here’s how it works:
How to setup and implement your late fees
Step 1. Work out the type of late fee you'll charge
Decide whether you’ll charge a fixed or interest-based late fee and at what rate you will set it at.
Step 2. Setup your late fee policy
Next, create a late payment policy and send it to your customers for them to agree to. For help with writing your policy, see our examples.
Step 3. Get started!
Then, implement your late fee policy by manually implementing your fee on overdue invoices each time they go overdue.
Optional: Automate your late fees with Paidnice!
Paidnice is a Xero app that will automatically detect when your invoices go overdue, and issue your customers a penalty, either a late fee or an interest charge, and either add this to your existing invoice as a line item, or issue a new invoice as a penalty.
Want to see Paidnice in action? Watch our tutorial video and learn more about getting started with Paidnice today.
Please note that the information found in this blog serves to inform but does not constitute legal advice. For information specific to your industry, we recommend contacting a legal professional.
