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Interest Calculation Formula:
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Interest calculation on unpaid invoices is a method to determine the additional amount owed when a payment is overdue. This helps businesses recover costs associated with delayed payments and encourages timely payments from clients.
The calculator uses the interest calculation formula:
Where:
Explanation: The formula calculates daily interest by dividing the annual rate by 365 days, then multiplies by the number of days the payment is overdue.
Details: Calculating interest on overdue invoices is important for maintaining cash flow, compensating for the time value of money, and enforcing payment terms in business contracts.
Tips: Enter the original invoice amount, the annual interest rate percentage, and the number of days the payment is late. All values must be positive numbers.
Q1: Is it legal to charge interest on late payments?
A: In most jurisdictions, yes, provided it's stated in your contract terms and the rate is reasonable. Check local regulations for specific requirements.
Q2: What is a typical interest rate for late payments?
A: Rates vary but often range from 1-2% per month (12-24% annually). Some jurisdictions have statutory rates for commercial debts.
Q3: Should I use 365 or 360 days for calculation?
A: Most calculations use 365 days for annual interest calculations, but some financial institutions use 360 days. Check your contract terms.
Q4: Can I compound interest on overdue invoices?
A: Yes, if specified in your contract terms. Compound interest would be calculated differently than the simple interest shown here.
Q5: How should I communicate interest charges to clients?
A: Clearly state your late payment policy in initial contracts and include the calculated interest as a separate line item on follow-up invoices.