Calculating Late Invoice Interest

Calculating late invoice interest is a straightforward process.

Calculate what the interest would be for a full year

Multiply the amount owed by the rate of interest (base rate plus 8%).

For example, if the debt is £10,000 and the base rate 4.5%, then the interest would be £10,000 x 12.5% = £1,250.

Calculate the daily interest by dividing the annual interest by 365

For example, the daily interest on this £10,000 debt is £1,250 ÷ 365 = £3.42

Calculate the interest due by multiplying daily interest by the number of late days

For example, if the £10,000 debt were paid 30 days late, you could charge £3.42 x 30 = £102.60

Any part payment normally goes towards reducing the interest owed first

For example, if you received payment of £10,000 in respect of the £10,102.60 now being charged, the amount outstanding would be £102.60 of the original debt. Interest on the £102.60 would continue to accrue.

Important: This does not apply if you have agreed otherwise with your customer.

Late Invoice Interest Calculation FAQ

What is late invoice interest?

Late invoice interest is the additional fee charged by a business when a customer fails to pay an invoice on time. This fee is typically calculated as a percentage of the outstanding balance on the invoice and may be charged on a daily or monthly basis.

How is late invoice interest calculated?

The formula for calculating late invoice interest varies depending on the business’s policies. Generally, late invoice interest is calculated as follows:
1. Determine the annual interest rate to be charged on late invoices (this is typically specified in the business’s payment terms).
2. Convert the annual interest rate to a daily rate by dividing by 365 (or 360, depending on the business’s policies).
3. Multiply the outstanding balance on the invoice by the daily interest rate to determine the daily interest charge.
4. Multiply the daily interest charge by the number of days the invoice is past due to determine the total late invoice interest charge.

What are some common annual interest rates for late invoices?

Common annual interest rates for late invoices range from 1% to 2%, but can be higher depending on the business’s policies and the industry. It’s important to review your payment terms carefully to understand the interest rate that will be charged on late invoices.

When is late invoice interest charged?

Late invoice interest is typically charged when an invoice is past due. The exact terms for when late invoice interest will be charged should be specified in the business’s payment terms.

Can late invoice interest be waived?

Whether or not late invoice interest can be waived depends on the business’s policies and the circumstances surrounding the late payment. In some cases, businesses may choose to waive late invoice interest as a gesture of goodwill to customers who have a history of paying on time. However, businesses are not obligated to waive late invoice interest and may choose to enforce their payment terms strictly.

What should I do if I receive an invoice with late invoice interest charges?

If you receive an invoice with late invoice interest charges and believe that the charges are incorrect or unfair, you should contact the business that issued the invoice to discuss your concerns. Be prepared to provide documentation and evidence to support your position.