When client invoices pass their agreed payment deadline (e.g. Net 30 days), accruing interest penalties compensates your business for lost investment opportunity and administrative debt collection costs.
1. Simple Interest Calculation Formula
Simple annual interest calculates fee accrual proportional strictly to the original principal balance:
Formula: Interest = Principal × (Annual Rate / 100) × (Overdue Days / 365)
Example: $10,000 principal at 12% annual rate overdue by 45 days:
$10,000 × 0.12 × (45 / 365) = $147.95 Late Interest
2. Compound Daily Interest Formula
Compound daily interest adds accrued daily interest back into the principal before computing the next day's fee:
Formula: Total Due = Principal × (1 + Daily Rate)^Days
Where Daily Rate = Annual Rate / 365
3. Statutory Legal Frameworks
• UK Commercial Debts Act: Statutory rate is 8% above Bank of England base rate plus fixed compensation fees (£40 to £100).
• US Prompt Payment Act: Federal interest rate updated semi-annually by US Treasury.
• Try instant calculations using Vicaksha's Late Fee Calculator Engine.