Charging interest on overdue invoices.
A customer is months late and you’re out of pocket. Can you add interest? Often, yes, but how much depends on what was agreed before the work was done.
By Kyle Zorger, founder of ARS Financial · Updated · 4 min read
In short
- If the customer agreed to terms that allow interest on late payment, you can generally claim it at the agreed rate.
- Terms printed only on the invoice, after the sale, may not bind a customer who never agreed to them.
- If no rate was agreed, you can generally claim interest at the rate prescribed under the Prescribed Rate of Interest Act 55 of 1975, which is linked to the Reserve Bank’s repo rate.
- Under the in duplum rule, arrear interest stops running once it equals the unpaid capital.
- Charging interest or fees on deferred payments to individuals or small businesses can bring the National Credit Act into play.
When you can charge interest
The strongest position is an interest clause the customer agreed to before you did the work: in a signed credit application, accepted quote or terms and conditions. Then you can generally claim interest at the agreed rate from the date payment was due.
Adding an interest line to an invoice or statement after the fact is weaker. If the customer never agreed to those terms, they may not be bound by them.
If no interest rate was agreed
A debtor who pays late is in default, and you can generally claim interest on the overdue amount at the rate prescribed under the Prescribed Rate of Interest Act 55 of 1975. That rate is linked to the South African Reserve Bank’s repo rate (the repo rate plus 3.5 percentage points) and is published by the Minister of Justice, so it moves when the repo rate moves.
Where there was no fixed date for payment, interest generally runs from when you demanded payment, which is another reason to put your demand in writing.
The in duplum rule
South African law caps arrear interest: once the unpaid interest equals the outstanding capital, interest stops running. On a R10,000 invoice, for example, arrear interest can’t grow beyond a further R10,000 while the debt stays unpaid.
Watch out for the National Credit Act
If you let customers pay later and charge them interest or fees for doing so, that arrangement can count as an incidental credit agreement under the National Credit Act when the customer is an individual or a smaller business. The Act then limits what you can charge and how you collect. If that sounds like your business, get advice from an attorney.
Practical tips
- Put an interest clause in your terms and conditions, and get them accepted before the first job.
- State the rate clearly, for example as a percentage per month or linked to the prime rate.
- Show interest separately on statements, so the customer can see the capital and the interest.
- Be reasonable: interest strengthens your position, but the aim is to get paid.
This guide is general information, not legal advice.
Frequently asked questions
The rate you and the customer agreed in advance. If no rate was agreed, you can generally claim interest at the rate prescribed under the Prescribed Rate of Interest Act, which is the repo rate plus 3.5 percentage points.
Only if the customer agreed to pay interest on late payments, or at the prescribed rate once they are in default. Adding a new interest charge the customer never agreed to is unlikely to be enforceable.
A rule that stops arrear interest from running once the unpaid interest equals the outstanding capital, so interest can never more than double the debt while it remains unpaid.
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