How To Calculate Late Payment Interest
Before you can calculate interest on an overdue invoice, you must first determine the penalty APR. The rate you can charge varies from state to state, so be sure to check with your accountant for your state's usury limits.
Once you have determined the penalty APR, use the following steps to calculate interest on overdue invoices:
- Determine the amount that is past due. For example, if you billed $1,000 to a customer with net-30 terms, and 30 days has passed without payment, the past due amount would be $1,000.
- Calculate the daily penalty rate by dividing the annual penalty rate by 365. For example, if the annual rate is 8%, convert the percentage to a decimal (8% = 0.08) and divide by 365 to get a daily rate of 0.00021918 (0.0192%).
- Determine the number of days the invoice is past due. For example, if the invoice was due on June 1st, and the new statement date is July 1st, the invoice would be 30 days past due.
- Multiply the daily rate by the number of days past due, and then by the past due amount to get the total late fee. For example, if the daily rate is 0.00021918 and the $1,000 invoice is 30-days overdue, the total late fee would be $6.58 (0.00021918 x 30 x $1,000).
If the next billing term passes without receiving the payment for the past due invoice, repeat the above steps for the next billing cycle. For example, if the $1,000 invoice is not received by August 1st, the late payment fee would increase to $13.37 (0.00021918 x 61 x $1,000).