How to Calculate Interest on a Late Invoice

The daily interest formula

Most late-payment clauses accrue interest daily, which sounds fiddly but rests on one straightforward formula:

Daily interest = Outstanding amount × (Annual rate ÷ 365)

So at 12 per cent per annum, a $10,000 debt accrues $10,000 × (0.12 ÷ 365), which is about $3.29 per day. To find the total interest owed at any point, you simply multiply that daily figure by the number of days the invoice has been overdue. Working it out this way means you can quote an exact, defensible figure for any date the customer asks about, rather than a vague estimate. Bear in mind that interest is only enforceable if the rate is set out in your agreed terms of trade — this is general information, not legal advice.

Count the days correctly

Interest accrues from the day after the due date — not from the invoice date, and not from the day you first sent a reminder or noticed the account was overdue. The customer had until the due date to pay, so that is where their grace ends and the interest begins. As a worked count, if the invoice was due on 31 July and is paid on 30 August, that is 30 overdue days.

Be consistent about how you count. Use calendar days unless your terms specify otherwise, and stop the clock on the day the payment actually clears your account, not the day the customer claims to have sent it. Getting both the start point and the end point right is exactly what keeps your figure defensible if the customer queries it, so it pays to be precise rather than approximate.

A worked example

It helps to see the formula applied to real numbers. Take the same $10,000 invoice at 12 per cent per annum, with daily interest of $3.29, and watch how it grows as the days pass:

After 30 days

$10,000 + (30 × $3.29) = $10,098.63

After 90 days

$10,000 + (90 × $3.29) = $10,295.89

The amounts are modest on a single invoice over a short period, but they add up across multiple overdue accounts and longer delays, and they give the customer a concrete reason to pay sooner. To skip the arithmetic entirely on any invoice, rate and date, use the late fee calculator, which works out the exact interest accrued to a given day for you.

Simple, compound and records

The example above uses simple interest — charged on the original $10,000 only, no matter how long it runs. If your terms instead specify compound interest, you periodically add the accrued interest to the balance and calculate the next period on that new, larger total, so the amount grows faster over time. Compound interest can be reasonable on long-overdue debts, but only use it if your terms clearly allow it, since charging it without authority is not enforceable.

Whatever basis you calculate on, document it properly. Issue the interest as a separate tax invoice or debit note rather than folding it silently into the principal, show the rate, the principal, the number of days and the resulting total so the customer can check your working, and record the interest as taxable income in your accounts and BAS.