What is compound interest on overdue invoices?
Compound interest on overdue invoices is interest charged on the unpaid balance plus any interest already added, so each period's charge is larger than the last. Simple interest is charged on the original debt only. On £10,000 at 12% a year, simple interest over twelve months is £1,200.00 and monthly compounding is £1,268.25.
A seller can usually charge compound interest only when the contract says so before the invoice is raised. UK statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998 is simple interest at 8% above the Bank of England base rate.
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