How to Figure Interest on Past Due Invoices

One of the challenges of being self employed is trying to collect money from your customers. While some freelancers ask for payment at the job completion, others may have to invoice their customers once they've had a chance to tally up the material and labor costs.

To encourage my clients to pay their invoices promptly, I include a disclosure at the bottom of my invoices that state "interest will be charged on past due balances at a rate of 1.5% a month." This gives my clients proper notice that there will be a penalty if they are late in paying their bills. Since the due dates on my invoices are always on the 10th of the month, missing the due date means that the next statement will contain an interest penalty.

How much interest to charge is completely up to you. I've seen businesses charge anywhere from 1% a month (12% annually) to 2.75% a month (33% annually), though most service oriented businesses tend to be somewhere in the middle.

So, how do I calculate interest?

To illustrate, let's suppose you've contracted for $1000 worth of work for the Acme Tool company. The invoice left with the business office notes that payment is expected on the 10th of the month.

If Acme doesn't pay the invoice by the 10th of the month, the next statement should include the interest penalty. To calculate the interest, multiple the balance due of $1000 x 1.5% for an interest charge of $15.00. This is added to the original invoice for a new balance due of $1015. And what happens if they miss the due date again? The following month, multiple the new balance of $1015 x 1.5% for an interest charge of $15.23. This is added to $1015 for a total now due of $1030.23.

For each month that the bill goes unpaid, multiple the new balance due by 1.5% and add the interest. If your client still hasn't paid by the end of the third month, you may have to go to small claim's court to collect what's owed.

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