If you have a customer with an outstanding and overdue invoice, charging him interest might give him the incentive to pay up. To charge the right amount of interest, use a daily interest rate derived from the customer agreement and apply it based on the payment terms specified on the customer invoice.
Determine Daily Interest Rate
Calculate the daily interest rate for the invoice. The invoice payment terms, customer contract or company policy should specify the rate of annual interest charged on overdue invoices. To calculate the daily interest rate from the annual interest, divide the annual interest rate by 365. For example, if the annual interest rate is 10 percent, the daily interest rate is 0.027 percent.
Identify Payment Terms
Determine how many days overdue the invoice is. The invoice will specify when payment is due. Payment terms are usually in 15, 30, 60 or 90 days. They're sometimes labeled as "net 30," "net 60" or "net 90." The payment countdown starts on the invoice date or the day the invoice is sent. For example, if an invoice was sent January 1 and has net 30 payment terms, it is late as of February 1.
Calculate Interest Charge
To calculate the interest charge, multiply the number of days the invoice is overdue by the daily annual rate and the value of the invoice. For example, say it's February 28, the invoice is still unpaid and $2,000 is owed on the invoice. The monthly interest charge is 28 days multiplied by 0.027 percent -- numerically, that's 0.00027 -- which in this instance is multiplied by $2,000, or $15.12.
Assess Interest in Subsequent Months
If the invoice continues to go unpaid, assess new interest charges every month using simple interest. Follow the same formula as above: the number of days in the month multiplied by the daily rate multiplied by the invoice balance. For example, if the invoice balance is still $2,000 at the end of March, the interest charges for March would be 31 multiplied by 0.027 percent multiplied by $2,000, or $16.74.
Some states have usury laws that limit the amount of interest that can be charged on late payments. Check with your state's Department of Justice before assessing finance charges on customers.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.