A Guide To Charging Interest On Overdue Invoices
Customers who pay late threaten not just your business growth, but its very existence.
One obvious way to encourage prompt payments and offset the impact of late payment is to charge interest on overdue invoices.

This guide provides a full overview of late payment interest charges, including:
- what the law in Malaysia says
- how to calculate interest on overdue invoices
- what to do when a client refuses to pay, and
- some case law for the nerds
Note: If you’re currently facing late payments, a guide to SME debt recovery might be more useful!
Otherwise, let’s begin.
🔑Key Takeaways
- Charging interest on overdue invoices is legal in Malaysia if terms are clearly outlined in the contract.
- A generally accepted interest rate for late payments is 18% per annum / 1.5% per month.
- Include a late payment interest clause in contracts and invoices to avoid disputes.
- Send delinquent customers regular updated Statements of Accounts with interest included.
- Seek legal advice if you need assistance in enforcing late payment!
Freedom of contract and late payment interest
The legal framework in Malaysia upholds the principle of freedom of contract.
Businesses are generally free to set their own payment terms, including the imposition of interest on overdue invoices.
However, it requires two conditions to be legally enforceable:
- Both parties agree to a late payment interest rate in the contract or invoice terms.
- The agreed rate is not deemed excessive or unconscionable.
The first condition is quite straightforward, but the second is definitely more subjective – what exactly is the threshold for excessive or unconscionable?
To avoid this becoming an issue, we recommend following a common rate in Malaysia.
A common overdue invoice interest rate
1.5% per month or 18% per year is a common interest rate for overdue invoices in Malaysia. widely seen as reasonable and reflecting a typical market rate for unsecured debt.
You may think 1.5% isn’t enough for the stress and troubles you may endure.
Alas, a late payment interest charge is not to punish debtors, but protect creditors.
As we may all be on the paying end one day, be glad the law safeguards the interests of everyone!
Commercial debts in construction
Under Section 25 of the Construction Industry Payment and Adjudication Act (CIPAA) contractors and suppliers are allowed to claim late payment interest.
Specifically the default interest rate is calculated based on the prevailing Bank Negara Malaysia rate, unless a higher rate has been explicitly agreed upon in the contract.
Formula for overdue invoice interest
Interest = (Invoice Amount) x (Interest Rate per Period) x (Number of Overdue Periods)
Here’s an example using 18% per annum or 1.5% per month.
Invoice Amount | Interest Rate | Duration of Delay | Interest Charged |
MYR 1,000 | 18% p.a. | 3 months | MYR 45 |
MYR 2,500 | 1.5% per month | 2 months | MYR 75 |
For a MYR 1,000 invoice with an interest rate of 1.5% per month, the interest for a 3-month delay would be: MYR 1,000 x 1.5% x 3 = MYR 45
And yes, this breakdown was sponsored by ChatGPT (but overseen by us) 😀
Considerations for overdue invoice charges
Here are three simple considerations to ensure you can legally charge interest on overdue invoices and avoid disputes.
1. C.L.E.A.R.L.Y. state terms
Ensure that your invoices and contracts explicitly mention the interest rate for late payment of commercial debts.
Include a late payment clause such as:
“Late payments will incur interest at 1.5% per month (18% per annum) from the due date until full settlement.”
2. Communicate terms upfront
Make sure your clients are aware of your payment terms and the late payment interest rate before you deliver goods or services.
This can be done by including the terms in a Quotation or Service/Sale Agreement, which should be countersigned by the client.
3. Avoid excessive interest rates
While 18% p.a. is generally accepted, excessively high interest rates beyond this may be deemed unreasonable or unconscionable.
Keep the rate within what is considered a fair market rate.
What to do when clients refuse to pay
If you satisfy the two requirements at the start (both parties agreed to it and it is not excessive), you have a debt recovery case on your hands.
Here’s a summary of the four steps involved in debt collection:
- Assess the debtor’s ability to pay and any valid defenses.
- Issue a polite final reminder with payment details and a clear deadline.
- Have a lawyer send a formal demand for payment or initiate legal action.
- Use legal methods like garnishment or asset seizure, or explore tax write-offs if recovery isn’t possible.
We explain this in full detail in our B2B guide to debt recovery.
Case law on overdue invoices
The first case establishes that late payment interest charges should generally be honoured, while the second highlights an example of when the rate is deemed excessive.
- Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors [2008] 5 MLJ 631
- Chartered Electronics Industries Pte Ltd v Comsa Properties Sdn Bhd [1998] 4 MLJ 529
The latter is why we recommend sticking to 1.5% per month!
Let MISHU help with your debt recovery
MISHU is partnered with numerous professional business service providers to help us deliver a comprehensive suite of solutions tailored to SME owners. Let us connect you with the right experts to meet your needs!