Late Payment Interest Calculator
Late Payment Interest Calculator
Report Bug Cash flow is the lifeblood of any business, and late payments are the artery blockers. In the US business landscape, time literally costs money. The Late Payment Interest Calculator is a vital tool for creditors to enforce payment terms and for debtors to understand the penalty of delay. It calculates the accrued interest on overdue invoices, ensuring you are charging (or paying) the correct amount according to your contract or state laws.
Whether you are dealing with a "Net 30" breach or calculating damages for a small claims court case, precision is non-negotiable.
⚖️ The Interest Formula (Commercial Standard)
Unlike credit cards which often compound, most B2B invoice interest is calculated as "Simple Interest." The standard US formula to determine the daily penalty is:
Variables defined:
- Principal: The original invoice amount due.
- Rate: The Annual Percentage Rate (APR) specified in the contract (e.g., 18% per year).
- Days Late: Days passed since the due date (Not the invoice date).
- 365: The standard annualized divisor (some banks use 360).
📉 Scenario: The "90 Days Past Due" Reality
Let's analyze a common scenario: A Freelancer has an unpaid invoice of $10,000. The contract states a late fee of 1.5% per month (which equals 18% APR). The client is 90 days late.
| STATEMENT OF ACCOUNT - PAST DUE | |
|---|---|
| Original Invoice Amount | $10,000.00 |
| Due Date | Jan 1, 2025 |
| Current Date | Apr 1, 2025 |
| Days Past Due | 90 Days |
| (+) Interest Accrued (18% APR) | + $443.84 |
| Total Amount Due Now | $10,443.84 |
Strategic Insight: By enforcing the late fee, the creditor recovers the loss of value caused by inflation and the opportunity cost of not having that cash on hand for 3 months.
Legal Limits & Best Practices (US Standards)
- Usury Laws: Every US state has a maximum interest rate limit (Usury Limit). While 1.5% per month (18% APR) is standard in contracts, charging 50% APR could be illegal and void the debt. Always check state statutes (e.g., California vs. New York limits).
- Prompt Payment Act: For US Federal Government contracts, if the government pays you late, they are required by law to pay interest automatically.
- "Net 30" Terms: Interest generally only starts ticking after the grace period (e.g., Day 31).
Frequently Asked Questions (FAQs)
What is the maximum interest rate I can legally charge?
This depends entirely on your state's "Usury Laws." For consumer debt, limits are strict. For commercial (B2B) debt, limits are often higher or non-existent if agreed upon in a contract. A common safe harbor in business contracts is 1.5% per month (18% annually), but you should consult a legal professional.
Simple Interest vs. Compound Interest: Which one applies?
For most overdue invoices, courts and standard business practices uphold Simple Interest (interest calculated only on the principal). Compound Interest (interest on interest) is rarely enforceable for invoices unless explicitly stated in a signed contract and allowed by state law.
Can I charge a flat "Late Fee" instead of interest?
Yes. Many businesses charge a flat fee (e.g., "$50 Late Fee") instead of a percentage. However, this fee must be "reasonable" and not punitive. If the fee is disproportionately high compared to the debt, a judge may rule it as an illegal penalty.
Do I have to pay taxes on late fee income?
Yes. The IRS considers late fees and interest collected as taxable income. It should be recorded in your books as "Interest Income" or "Other Income," separate from your standard Sales Revenue.
What if there is no contract?
If you don't have a written contract specifying a rate, you are usually limited to the "Statutory Interest Rate" of your state. This is often much lower than market rates (e.g., 6% to 10% per year). This is why having signed Terms & Conditions is crucial.
