Interest is a percentage of the total amount that’s added to the sum. One example is interest on invoices that are paid late.
There are many different types of interest, but what they have in common is that they’re a small percentage of the total amount, and increases the money you have to pay or the money that’s owed, depending on what type it is.
Let’s look at some examples.
Interest on bank deposits
You can get interest on your bank deposits. If you have the money in a savings account you usually get around 1-2 percent of the total amount per year. This money should be included in the total revenue of your business, which is recorded in your general ledger and on your income statement.
Interest on loans
If you have a loan in the bank or another credit institution, or from another company, you’ll usually pay some amount of interest on the loan, in addition to the actual loan amount. How much you’ll have to pay, depends on the terms of your agreement.
You can usually choose between a fixed rate or a variable rate—sometimes referred to as adjustable or floating—that can at times be less than the fixed rate, and at other times higher.
Late payment fees
Late payment fees or delay interest, is a fee that you can add to the invoice sum if your client doesn’t pay by the due date. The fee is usually a percentage of the invoice amount.
The fee usually starts running the day after payment is due, but usually a certain number of days have to have passed before you can charge it—you should check what applies in your country.
If you’re going to charge late payment fees, you should include information about late payment fees in your contracts or your invoices.
