The Cost of Slow Payment: Every Day Past Terms Is a Loan You Made
An invoice paid 45 days late is credit you extended at your cost of money, not the customer's. How to price it, and the levers that actually shorten the float.
The most patient lender a small business has is itself. Every invoice sitting past terms is credit extended to the customer — unsecured, at your cost of money, with no agreement that anyone signed. The books record it as 'receivable'; the reality is a loan the business never decided to make.
Pricing the loan
Financing cost = invoice × annual rate × (days late ÷ 365). A $2,500 invoice on net-30 that pays at 75 days, with money costing 20% a year: $2,500 × 0.20 × (45 ÷ 365) = $61.64. That's 2.5% of the invoice — on a job priced at a 30% margin, better than a twelfth of its profit, gone to financing someone else's cash flow.
| Line | Calculation | Amount |
|---|---|---|
| Cost per invoice | $2,500 × 0.20 × 45/365 | $61.64 |
| Annual drag, 60 invoices | 60 × $61.64 | $3,698.40 |
| Working capital tied up | $2,500 × (75 ÷ 365) × 60 | $30,821.92 |
The last row is the quieter problem: at any moment, thirty thousand dollars the business earned is sitting in customers' accounts, financing their operations. Every rate rise, fuel increase and insurance renewal is paid out of cash the business has already earned but not been paid.
The levers, in order of power
- Deposits on long jobs — 30–50% up front removes most of the float before it exists.
- Payment on completion instead of net terms, wherever the customer type allows it.
- Invoice the day of completion — an invoice sent end-of-month silently adds weeks.
- A stated late fee, actually applied. A fee that never gets applied is a suggestion, and suggestions don't collect.
The discount, both directions
Prompt-pay math is asymmetric. Offering 2/10 net 30 to customers gives up 2% to accelerate cash 20 days — an implied 37% annual rate, expensive unless money is truly brutal. Taking the same discount from your own suppliers is the mirror image: paying early at an implied 37% return is better than almost anything the cash was doing. Take them when offered; offer them sparingly.
Price your payment terms with the late payment calculator →
Frequently asked questions
How much does a late payment really cost?
Invoice × your annual cost of money × days late ÷ 365. A $2,500 invoice paid 45 days past net-30 at a 20% rate costs $61.64 — about 2.5% of the invoice, in pure margin, for zero work. Across a book of 60 such invoices, that's $3,698 a year.
What rate should I use as my cost of money?
Your actual marginal cost: the overdraft or credit-line rate if you run one, or what idle cash could reasonably earn if you're debt-free — plus the risk of the receivable itself. It is never zero: money in someone else's account is money not working in yours.
Are early-payment discounts worth offering?
Compute the implied rate first: 2/10 net 30 gives up 2% of the invoice to move cash 20 days earlier — an implied annual rate of (2 ÷ 98) × (365 ÷ 20) ≈ 37%. Taking such discounts from your own suppliers is usually sound; offering them is expensive unless your cost of money is genuinely brutal.
Tools for this
Ready to run the numbers?
Open the Payment Terms & Late Payment Calculator and apply this guide with your own figures.
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