Invoice Interest Compounding Calculator
Calculate and compare simple vs compound interest on overdue invoices. Enter the invoice amount, monthly interest rate, and number of months overdue — see the side-by-side totals and a month-by-month breakdown of how interest accumulates.
Simple vs. Compound Interest on Invoices — Explained
Late payment interest is almost always calculated as simple interest — but understanding compound interest and how it differs helps you write clearer contracts and avoid disputes.
Simple Interest
Calculated on the original principal only. Each period, the same amount of interest accrues.
$5,000 × 1.5% × 6 months
= $450 interest
= $5,450 total due
- ✓ Used by UK LPCD Act
- ✓ Easier to calculate
- ✓ Widely accepted
- ✓ Less likely to be disputed
Compound Interest
Calculated on the growing balance — interest accrues on both the principal and previously accumulated interest.
Month 1: $5,000 × 1.5% = +$75
Month 2: $5,075 × 1.5% = +$76.13
...
Month 6: $5,380 × 1.5% = +$80.70
- — Higher total for creditor
- — Harder to explain to clients
- — More likely to be challenged
- — Rarely used in practice
When Each Type of Interest Applies
UK B2B late payment (LPCD Act)
The UK Late Payment of Commercial Debts Act 1998 mandates simple interest at 8% + BoE base rate. Your contract cannot reduce this, but can replace it with a higher or comparable rate.
EU B2B late payment (Late Payment Directive)
EU Directive 2011/7/EU specifies simple interest at ECB reference rate + 8 percentage points. Applied automatically to B2B transactions.
US contractual late fees (most states)
US courts generally apply whatever the contract specifies. Simple interest at 1.5%/month (18%/year) is standard and enforceable in most states. Compound clauses are legal but less common.
Your own late payment clause
Unless you have a specific reason to use compound, specify simple interest in your clause. It is cleaner, easier to communicate, and less likely to be disputed.
Frequently Asked Questions
What is the difference between simple and compound interest on an invoice?+
Simple interest is calculated on the original invoice amount only: Interest = Principal × Rate × Time. Compound interest is calculated on the growing balance — each period, interest accrues on the previous interest as well as the principal. For short overdue periods (1–3 months), the difference is small. Over 12+ months, compound interest can be materially higher. Most late payment clauses use simple interest because it is easier to calculate and explain.
Which type of interest should I use in my late payment clause?+
Simple interest is recommended for most freelancers and small businesses. It is easier to calculate, easier to communicate to clients, and is what most statutory frameworks use (including the UK Late Payment of Commercial Debts Act). Compound interest clauses are legally valid in many jurisdictions but are more likely to be challenged in court as punitive, especially at higher rates. The 1.5%/month simple interest standard is widely accepted.
What interest rate does UK statutory late payment law use?+
The UK Late Payment of Commercial Debts Act 1998 specifies simple interest at 8% per year above the Bank of England base rate. As of 2026, with the base rate around 4.75%, the statutory rate is approximately 12.75% per year — or roughly 1.06% per month. This is simple interest applied to the original invoice amount from the day after the due date. Use the UK Statutory Interest Calculator for the exact figure.
How do I calculate daily interest on an invoice?+
For simple interest: Daily rate = Annual rate ÷ 365. Daily interest = Invoice amount × Daily rate. For example, at 18% per year (1.5%/month), the daily rate is 18% ÷ 365 = 0.0493%. On a $5,000 invoice, that is $2.47 per day. Over 45 days overdue, the total interest is approximately $111. This calculator uses monthly periods for simplicity, but the daily approach is more accurate for precise calculations.
Can I charge compound interest on an invoice in the UK?+
The UK Late Payment of Commercial Debts Act 1998 specifies simple interest, not compound. Your contract can specify compound interest instead, but this overrides the statutory rate only if it provides a 'substantial remedy' for the creditor. In practice, compound interest clauses in UK B2B contracts are rare and potentially harder to enforce at high rates. Simple interest at the statutory or contracted rate is the standard.
Track Who Owes You — Automatically
Calculating interest is step one. Collecting it requires a systematic chase process — reminders at the right time, in the right tone, with the correct fee amounts included.
Also useful: Late fee calculator · UK statutory interest calculator · How to charge late fees · Late fee clause generator