Compounding Interest on Invoices
Encourage timely payments by applying compounding interest to overdue invoices.
What is Compounding Interest?
Compounding interest is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. Unlike simple interest, where interest is only calculated on the principal amount, compounding interest allows interest to grow faster because you are earning 'interest on interest'.
How it Works on Invoices
When an invoice becomes overdue, you can apply an interest rate that compounds over a specific cadence (e.g., weekly or monthly). This means the outstanding balance grows over time, creating a stronger incentive for clients to pay promptly.
Formulas & Calculations
The formula for compound interest is:
A = P(1 + r/n)^(nt)- A
- The future value of the loan/invoice, including interest
- P
- The principal investment amount (the initial invoice balance)
- r
- The annual interest rate (decimal)
- n
- The number of times that interest is compounded per unit t
- t
- The time the money is invested or borrowed for
Example Scenario
Invoice Amount: $1,000 Interest Rate: 5% per month Cadence: Monthly Overdue: 3 months
Flexible Configuration
Flexible Controls
System-Level Application
Configure a default policy for your entire business. Automatically apply compounding interest rules to all new invoices created in the system.
Individual Invoice Level
Override system defaults or apply specific interest rules for individual invoices or clients.
Customizable Settings
- •Set the interest rate as a percentage of the balance.
- •Choose the compounding frequency: Weekly or Monthly.