What Is an Interest Rate?
An interest rate is the percentage charged on borrowed money or earned on savings, representing the cost of credit or return on investment. In invoicing and business finance, interest rates primarily affect:
Late payment penalties on overdue invoices
Business loans and lines of credit
Customer financing options
Investment returns on business deposits
Types of Interest Rates in Business Finance
1. Simple Interest
- Calculated only on the principal amount
Formula: Interest = Principal × Rate × Time
Common for short-term business loans and invoice terms
2.Compound Interest
- Earns interest on both principal and accumulated interest
Formula: A = P(1 + r/n)^(nt)
Used in business savings accounts and long-term loans
3. Fixed vs. Variable Rates
| Type | Description | Best For |
|---|---|---|
| Fixed | Unchanged for loan term | Budget predictability |
| Variable | Fluctuates with market indexes | Short-term financing |
How Interest Rates Affect Invoicing
Late Payment Interest Calculations
Most businesses charge 1-2% monthly (12-24% APR) on overdue invoices. Example:
$5,000 invoice, 60 days late at 1.5% monthly:
Month 1: 5,000×1.5%= $75
Month 2: 5,075×1.5%= $76,12
Total Interest: $151.12
Early Payment Discounts
Some businesses offer discounts for prompt payment:
“2/10 Net 30” = 2% discount if paid in 10 days
Effectively creates a 43.9% annualized return for early payers
Current Interest Rate Benchmarks (2023)
| Type | Average Rate |
|---|---|
| Prime Rate | 8.50% |
| 30-Year Business Loan | 6-12% |
| Invoice Factoring | 1-5% per month |
| Business Credit Cards | 15-25% APR |
How to Calculate Interest on Invoices
- Determine daily interest rate:
Annual Rate ÷ 365
(Example: 18% ÷ 365 = 0.0493%) Calculate days overdue:
Payment Date – Due DateCompute interest:
Invoice Amount × Daily Rate × Days Late
Example:
- You have a $10,000 invoice that it’s 45 days overdue.
- Your interest rate is 18%.
- Invoice x (interest rate ÷ 365) x 45
- 10,000 × 0.000493 × 45 = $221.85 interest
Optimizing Interest Rates for Your Business
When Borrowing
Negotiate rate locks for long-term loans
Consider credit unions for lower rates
Maintain strong credit score (700+)
When Lending/Invoicing
Automate late fee calculations
Offer multiple payment options
Use invoice financing during cash crunches
Interest Rate Trends to Watch
Rising rates (2023-2024): Tighten credit policies
Alternative lenders: Fintechs offering competitive rates
Global impacts: Supply chain financing rates fluctuating
FAQs
Varies by state (typically 5-15% above federal funds rate)
Some states prohibit compound interest on late invoices
Yes! Clearly state:
Due date
Late fee policy (example: "1.5% monthly after 30 days")
Early payment discounts
Federal Reserve rate changes impact:
Business loan rates (+/- 2-3%)
Customer purchasing power
Your savings account yields
Depends on your position:
Borrowing: Low rates better
Lending/Saving: High rates better
