What is interest accrual on a late invoice and how do you calculate it?

Interest accrues on an overdue balance when contract or invoice terms specify a late payment interest rate. For example, "1.5% per month on balances past due" means a $10,000 invoice unpaid by the due date picks up $150 in interest at the end of the first month, bringing the balance to $10,150. If still unpaid after month two, interest accrues on the new $10,150 balance. That compounding is why late fee clauses need to state explicitly whether the rate is simple or compound.

Simple monthly interest is just outstanding balance times monthly rate. A $5,000 balance at 1.5% per month is $5,000 x 0.015 = $75 per month. Convert annual to monthly by dividing by 12 (18% annual is 1.5% monthly). State law often caps the maximum interest rate on commercial invoices, with common caps from 1% to 1.5% per month (12% to 18% annually). Going over the legal cap creates liability. Not legal advice; verify the cap in your state before setting your rate.

Interest accrual does two things: compensates the creditor for the time value of money tied up in an unpaid invoice, and creates a financial incentive for the customer to pay sooner. Many businesses with late interest clauses don't actually collect the accrued interest in practice. They use it as leverage and sometimes waive it in exchange for prompt payment of the principal. The right call depends on the customer relationship and the size of the balance.