Everything freelancers and small businesses need to know about charging late fees, interest rates, and collecting overdue invoices in California.
This information is provided for general educational purposes only and does not constitute legal advice. Laws change frequently. Consult a licensed attorney in California for advice on your specific situation. Last reviewed: 2026.
Usury laws cap the maximum interest rate that can be charged on overdue payments in California.
10% per annum (constitutional limit)
California's constitution (Article XV, Section 1) caps interest at 10% per annum for loans or forbearances where the lender is not a licensed lender. The default prejudgment interest rate is 10%. California's usury law has significant exemptions that effectively make the cap less restrictive for many commercial transactions.
Licensed lenders (banks, credit unions, finance companies) are exempt. Real estate brokers arranging loans, commercial loans over $300,000, and loans made or arranged by licensed real estate brokers are also exempt from the 10% cap under Cal. Const. Art. XV § 1(2).
Understanding what you can and cannot charge for late payments in California.
California Civil Code § 1671 governs liquidated damages provisions, including late fees. For non-consumer contracts, a liquidated damages clause is valid unless the party challenging it can show it was unreasonable at the time the contract was made. Late fees must be specified in the agreement.
No specific statutory cap on late fees for commercial contracts, but must be reasonable under Cal. Civ. Code § 1671.
For business-to-business contracts, the burden is on the challenging party to prove the late fee was unreasonable when the contract was formed. This is a more lenient standard than applies to consumer contracts.
California Prompt Payment Act sets deadlines and penalties for late payments in California.
30 days after receipt of an undisputed, properly submitted invoice for government contracts.
Late payments accrue penalty interest. For state contracts, the rate is the higher of 10% or the US Treasury Bill rate plus 1%.
California Government Code §§ 927-927.13 requires state agencies to pay undisputed invoices within 30 days (45 days for some agencies). Local government entities have similar requirements. For construction, Business and Professions Code § 7108.5 requires timely payment to subcontractors.
Certain industries in California have additional rules around payment timelines, liens, and collection procedures.
Construction: California's mechanics' lien law (Cal. Civ. Code § 8400) requires a 20-day preliminary notice. Liens must be recorded within 90 days of completion for direct contractors and 60 days for subcontractors. Stop-payment notices provide additional protections.
Government contracts: California's Prompt Payment Act (Gov. Code §§ 927-927.13) mandates 30-day payment with penalty interest. Construction retention payments have specific release timelines.
Technology: California's large technology sector often involves complex IP licensing agreements where late payment terms must comply with Cal. Civ. Code § 1671 reasonableness standards.
Use this compliant wording on your invoices to clearly communicate your late fee policy in accordance with California law.
Payment is due within 30 days of invoice date. A late fee of 1.5% per month (not to exceed 10% per annum as provided under Cal. Const. Art. XV § 1) will be applied to all invoices remaining unpaid after the due date. Per Cal. Civ. Code § 1671, this amount is agreed as reasonable liquidated damages for the cost of administering overdue accounts.
This wording works because it clearly states the rate, when it applies, and references California legal standards. Always ensure your stated rate complies with California's usury limits.
Practical tips for invoicing within California's legal framework.
Before you can charge a late fee in California, your client needs to have agreed to the terms. Include your late fee clause directly on your invoice and in your contract.
California caps interest rates at 10% (constitutional limit). Charging above this limit can void your right to collect interest entirely and may expose you to penalties.
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Compare California's rules with neighboring and commonly referenced states.
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