What is a late payment penalty?
For software vendors, receiving payments from customers on time is critical to keeping the business growing. To improve their chances of being paid on time, some vendors will include a late payment penalty in their sales agreement. The penalty assesses a fee for late payment of an invoice, typically expressed as a percentage of the past due amount.
Should you include a late payment penalty in your sales agreement?
You’ll need to consult an attorney for advice specific to your company, but there are generally two schools of thought on whether to include a late payment penalty.
The first is fairly straightforward and posits that the threat of late payment penalties provides some assurance that customers will pay on time because they want to avoid additional fees.
The Common Paper Committee adopted another perspective for the CSA, which is that late payment penalties are very rarely enforced in practice. Removing an unnecessary clause that is rarely used makes for more efficient negotiation. Whether you decide to include late payment penalties in your contract or not, keep in mind that in the Committee’s experience, the chances of successfully collecting on a late payment penalty were slim.
Sample langauge
Written to work with Common Paper standard agreements.
Include late payment penalty
Cloud Service Agreement version: 2.0
Add at the end of Section 4.5: “If Customer does not pay undisputed fees within the Payment Period, Customer will pay interest on the overdue amounts at the rate of 1.5% per month or the maximum rate permitted by Applicable Laws, whichever is less. In addition, Customer will reimburse Provider for all costs of collection (including attorneys’ fees).”
Cloud Service Agreement version: 1.0, 1.1
Add at the end of Section 5.2: “If Customer does not pay undisputed fees within the Payment Period, Customer will pay interest on the overdue amounts at the rate of 1.5% per month or the maximum rate permitted by Applicable Laws, whichever is less. In addition, Customer will reimburse Provider for all costs of collection (including attorneys’ fees).”