You can charge late payment interest in Alberta, though only if the customer agreed to it and only if the clause is drafted correctly. Federal legislation caps interest at five per cent per annum where a contract states a rate for any period shorter than a year without also stating the equivalent yearly rate. That single requirement quietly defeats a large share of the late payment clauses sitting in Canadian invoices and service agreements right now, including the familiar “2% per month” wording.
Key Takeaways
- Interest on overdue invoices requires an agreement. It does not arise automatically.
- A monthly or daily rate must state the equivalent annual rate, or interest is capped at five per cent per annum.
- The cap applies regardless of how high the stated monthly rate was.
- Collection cost recovery must be expressly agreed in advance to be enforceable.
- A separate criminal rate sets an outer ceiling, and it was lowered effective January 2025.
- Clauses that were never brought to the customer’s attention are difficult to enforce.
This article provides general information and is not legal advice. Have any interest or cost recovery clause reviewed by a lawyer before you rely on it.
You Need an Agreement Before You Can Charge Anything
Interest on an overdue invoice is not a default entitlement. It arises from agreement, which means it has to exist somewhere the customer actually accepted: a signed contract, a credit application, a service agreement, or terms the customer agreed to before the work was done.
Printing a line on the invoice after the fact is the weakest version of this. An invoice is a demand for payment issued after the deal was struck, so terms appearing there for the first time were never part of what the customer agreed to. Courts are reluctant to enforce interest a customer never accepted, and the practical result is that many businesses believe they have an interest entitlement they cannot actually use.
Building the term into onboarding rather than into billing is part of what separates functional accounts receivable management from documentation that only looks complete.
The Interest Act Trap That Voids Most Late Payment Clauses
This is the single most valuable thing in this article, and it catches sophisticated businesses regularly.
Why “2% Per Month” Is Not Enough
Section 4 of the federal Interest Act provides that where a written contract makes interest payable at a rate for any period less than a year, no interest exceeding five per cent per annum is chargeable, payable, or recoverable unless the contract contains an express statement of the equivalent yearly rate.
Read that against the wording most businesses use. “Interest at 2% per month on overdue accounts” states a monthly rate and nothing else. It does not state the yearly equivalent, so the clause is capped at five per cent per annum rather than the twenty-four per cent the drafter had in mind. The penalty is not proportional either. It does not matter whether the stated monthly rate was modest or aggressive.
How to State It Properly
Compliance is a drafting matter rather than a commercial one. The clause needs to express the annual rate explicitly alongside whatever periodic rate you use, so the customer can see the yearly figure on the face of the document.
Compounding adds a further wrinkle, since a nominal annual rate compounded monthly produces a higher effective rate, and how that is disclosed matters. This is the point at which to have a lawyer look at your standard terms rather than adapting wording from another company’s invoice.
Where No Rate Is Stated at All
The Interest Act also addresses agreements where interest is payable but no rate was fixed, setting it at five per cent per annum. That provision assumes an entitlement to interest already exists. It does not manufacture one where the parties never agreed to interest in the first place.
Is There an Upper Limit?
Yes, and it moved recently.
Section 347 of the Criminal Code sets a criminal rate of interest. Effective January 1, 2025, that rate was lowered to an annual percentage rate of thirty-five per cent, down from the previous effective annual rate of sixty per cent, which was roughly forty-eight per cent expressed as an APR. Regulations made at the same time set different treatment for certain commercial credit.
Rates in the range businesses typically apply to overdue trade accounts sit well below that ceiling, so this is context rather than a live constraint for most creditors. Anything unusually high, or terms that bundle fees and charges alongside interest, warrant advice, because the definition of interest in that provision is broad.
Can You Recover Your Collection Costs From the Debtor?
Sometimes, and it depends entirely on what was agreed before the account went bad.
The Clause Has to Exist Before the Default
A cost recovery clause makes the customer responsible for reasonable costs of collection, and possibly legal costs, if the account goes to enforcement. Where it was properly agreed in advance, it can shift a meaningful portion of the recovery cost.
Two conditions matter. The clause has to be part of the agreement rather than an afterthought, and it should be specific about what it covers. Vague wording invites argument at exactly the moment you want none. Deciding after the default that the customer should cover your costs does not create an obligation.
Even where the clause exists, what a court will actually award is a separate question, and that assessment belongs with legal services rather than with the collections file.
What an Agency Cannot Do
A distinction worth understanding. Alberta’s Collection and Debt Repayment Practices Regulation restricts a licensed collection agency from adding its own charges to what the debtor owes the original creditor.
Your contingency fee is paid out of the recovery. It is not bolted onto the debtor’s balance by the agency. A contractual cost recovery clause between you and your customer is a different mechanism entirely, and confusing the two produces both compliance problems and disappointed expectations.
What If Nothing Was Ever Signed?
Many commercial relationships run for years on purchase orders and email confirmations with no master agreement anywhere.
You can still pursue the debt. Payment obligations arise from the dealings between the parties, and the invoice, the delivery record, and the correspondence establish that. What you likely lack is contractual interest and contractual cost recovery.
A claim that reaches court does not necessarily run interest-free, since Alberta legislation addresses interest on judgment amounts, though any rate available there is set by statute rather than by you and should be confirmed for your situation. The gap between a statutory rate and a properly drafted contractual one is a quiet cost, and it compounds alongside the others described in the cost of delaying debt collection.
What a Workable Clause Addresses
Without straying into drafting, a functional set of terms covers the same ground every time:
- When payment is due and when an account becomes overdue
- The interest rate, expressed with its annual equivalent stated explicitly
- Whether interest compounds, and if so how often
- Who bears collection costs if the account is placed or litigated
- Whether the customer accepted these terms before the work began
- For corporate customers, whether an individual guaranteed the obligation
Businesses issuing terms across many small accounts should treat this as a standard document reviewed once rather than a per-deal negotiation, which is usually the practical route for small business debt collection exposure.
Common Questions About Late Payment Interest
The questions below come up constantly, and the answers surprise people.
How much interest can I legally charge?
Whatever you agreed, subject to the criminal rate ceiling and subject to the clause being drafted properly. The practical limit for most businesses is not the ceiling, it is the Interest Act disclosure requirement.
Our terms say 1.5% per month. Are we protected?
Probably not at that rate. Unless the contract also states the equivalent annual rate, interest is capped at five per cent per annum. This is worth checking today rather than at the point of enforcement.
Does interest keep accruing once an account is placed for collection?
Where the contract validly provides for it, accrued interest forms part of the balance being pursued, so a working clause increases what is actually recoverable. Where the clause fails the Interest Act test, that portion of the balance largely disappears.
Can I add a flat late fee instead of interest?
Flat fees raise their own questions about whether the charge is a genuine pre-estimate of loss or an unenforceable penalty, and depending on how it is structured it may be treated as interest.
Does charging interest hurt my chances of getting paid?
Not usually. Accrued interest is frequently waived as part of a negotiated settlement, which gives you something to concede, and that is often more useful in commercial debt collection than the interest itself.
Check Your Terms Before You Need Them
Most businesses discover their interest clause is unenforceable at the worst possible moment, when an account has already gone bad and they are calculating what they are owed. The fix takes an afternoon and a lawyer, and it applies to every invoice you issue afterward.
If you are holding overdue accounts now, the interest question is secondary to the recovery question. Bison Credit Solutions works aged accounts through third-party collections on a contingency basis, with no charge where nothing is collected.
Contact Bison Credit Solutions to discuss overdue accounts, and get your standard terms reviewed so the next ones are enforceable.
