Late payment penalties: how to apply them legally and effectively

What is a late payment penalty?

The late penalty is a sum owed by a customer when payment of an invoice exceeds its due date . It is intended to compensate the creditor for the financial loss suffered and to encourage compliance with payment deadlines.

What is the purpose of the late payment penalty?

It has a dual function:

• Discouraging late payment

• Repairing cash flow losses suffered by the company.

By applying a late payment penalty, you show that you are keeping track of your receivables and expect contractual commitments to be honored. It can also strengthen your position in the event of a dispute.

What's the difference between interest on arrears and damages?

Late penalties are provided for in advance in the contract or GTC, while the default interest are imposed by a judge when a dispute is settled. They are often applied in public procurement or litigation.

As for damages, they are intended to repair a broader loss (e.g. loss of sales) and require legal proceedings to be recognized.

What is the legal framework for late payment penalties?

The application of late payment penalties is strictly regulated by French law, particularly in relations between professionals. Here's what the law stipulates and requires in terms of penalties.

Is it compulsory on invoices?

Yes, in B2B relationships. Since the LME law (Loi de Modernisation de l'Economie), All professionals are required to state the conditions under which late payment penalties apply on their invoices. Failure to do so constitutes an offence punishable by an administrative fine of up to €375,000 75,000 for an individual).

However, this obligation does not apply to invoices for private customers, even if a penalty may be applied in the event of delay, provided the contract so stipulates.

Which article of law governs this penalty?

The late payment penalty is governed by article L441-10 of the French Commercial Code . This article requires that :

• The interest rate is either mentioned on the invoice or in the General Terms and Conditions ;

• The starting point of the penalty is the day following due date ;

• The fixed indemnity of €40 for collection costs is automatically payable.

By default, if nothing is contractually stipulated, the applicable rate is that of the ECB plus 10 points (i.e. around 11 to 12% depending on the period). The penalty does not no prior formal notice The new fee applies automatically as soon as the due date has passed.

How do you calculate a late payment penalty?

The calculation of late payment penalties is based on a method governed by law, which enables the precise amount due to be determined on the basis of the delay, the applicable interest rate and the invoice amount.

The official formula

The calculation of late payment penalties is based on a simple but rigorous formula:

Late payment penalties = (Amount incl. VAT x Annual interest rate) x (Number of days late / 365)

This method applies to the invoice amount including VAT, unless otherwise specified in the GTCS.

The number of days overdue is counted from the day after the due date to the day of actual payment. To avoid any disputes, remember to keep a record of the invoice and of the invoices issued. reminders sent .

This formula can be integrated into a spreadsheet to automate the calculation.

Which rate to use?

The interest rate to be applied is the one stipulated in your general terms and conditions of sale or on the invoice. However, it may not be less than three times the legal interest rate.

In the absence of a contractual rate, is the European Central Bank (ECB) rate in force on January 1 or July 1 of the year, increased by 10 points which applies automatically.

This scheme is designed to discourage recurrent late payment. You should therefore regularly update the information on your commercial documents.

Concrete example of calculation

Let's take the example of an invoice for €1,000 incl. VAT, with an annual interest rate of 12%, and a payment delay of 30 days.

The calculation is as follows:(1,000 x 12%) x (30 / 365) = 120 x 0.0821 = €9.86

The late payment penalties to be claimed from the customer therefore amount to 9,86 € .

This amount may seem low for a small sum, but it becomes significant on larger invoices or in the event of prolonged delay.

When and how to apply the late payment penalty?

The application of late payment penalties is governed by precise rules. It's not enough to calculate them: you also need to know when they apply, how to notify the customer, and whether they can be combined with other charges.

From the day following maturity

Late penalties are due automatically from the day after the due date shown on the invoice. No reminder or formal notice is required to claim them.

This rule reinforces the creditor's right to apply penalties as soon as the agreed deadline is exceeded, provided they are clearly specified in the General Terms and Conditions of Sale (GTCS).

Should I send a letter or a formal notice?

Even if the law doesn't require you to send a letter, sending a formal reminder or formal notice is a good idea. strongly recommended . This makes it possible to formalize the process and provide evidence in the event of a dispute.

A formal notice sent by registered letter with acknowledgement of receipt can also be used to trigger legal deadlines for initiating legal proceedings.

Is it possible to charge additional collection fees?

Yes, for sales between professionals, a fixed indemnity of €40 is automatically due in the event of late payment. In addition to late payment penalties and requires no justification of actual expenses.

This allowance must appear in the General Terms and Conditions and on invoices . If collection costs exceed this amount, you can also claim additional compensation, provided you can justify it.

What are the customer-specific rules?

The application of late payment penalties varies according to the type of customer. The rules are not the same for professionals, private individuals or public authorities.

B2B invoices

Between companies, late payment penalties apply automatically on the day following the invoice due date. They do not need to be included in a specific contract, as long as they appear in in the General Terms and Conditions or on the invoice .

A fixed indemnity of €40 for collection costs is also due by operation of law.

Bills to private individuals

Private individuals are not subject to the same obligations. Late payment penalties can only be applied to them if they are provided for in the contract or the general conditions accepted at the time of sale. They do not apply to not automatically. In addition, the flat-rate indemnity of €40 does not apply to B2C relationships.

Administrative invoices

Relations with public entities are governed by specific rules. Late payment penalties are generally set out in the French Public Procurement Code and vary according to the type of contract.

In the event of late payment, interest on arrears may be applied automatically, without any prior action on the part of the creditor. However, these rules require particular attention, and it is often advisable to consult an expert in public law or public procurement.

What are the best ways to avoid late payment penalties?

If applied incorrectly, late payment penalties can be ineffective or contested. Here are three common mistakes to avoid.

Forget to mention it on the invoice

To be valid, late penalties must must appear on the invoice. Otherwise, you will not be able to claim them, even in the event of late payment.

This statement must include the applicable interest rate and the amount of the €40 fixed penalty. The absence of this information can mean the loss of important leverage.

Applying an illegal rate

The chosen interest rate may not be less than three times the current legal rate nor exceed what is provided for in the general terms and conditions of sale.

An arbitrary or excessive rate may be deemed abusive and rejected in the event of a dispute. Be sure to comply with legal ceilings and justify the rate used.

Omit the €40 lump-sum payment

Since the Decree N°2015-1115 any late payment between professionals gives rise to a flat-rate indemnity of €40, in addition to late payment penalties. It is due automatically and must be mentioned on your invoices.

To forget this is to forego legal compensation intended to cover your collection costs.

Sample late payment penalty clause to copy onto your invoices

Here is an example that complies with the law, to be included in your General Terms and Conditions and on your invoices:

Clause type :

"In the event of late payment, a penalty will be applied at a rate equivalent to [indicate the rate used, at least 3 times the legal interest rate].In accordance with article L441-10 of the French Commercial Code, a fixed indemnity for collection costs of 40 euros will also be required."

This clause must be clear, visible and consistent with your general terms and conditions.

Hero helps you avoid delays with cash advances

Late payments have a direct impact on your cash flow. To remedy the situation, Hero offers a quick and easy financing solution: advance on invoice. You send an invoice to a business customer, Hero pays you within 48 hours, and then takes care of the rest until payment is received.

You secure your cash flow without having to wait for the due date or multiply your reminders. What's more, you limit your exposure to unpaid without mobilizing in-house collection staff.

Late payment penalties are an effective way of ensuring that payment terms are respected, provided they are applied correctly. Make sure you mention them on your invoices and comply with the legal rules, in particular the interest rate and the lump-sum indemnity. Solutions such as the Hero can help you secure your collections and avoid the negative effects of late payment.