1. What is the Finance Charge Calculation?

The Finance Charge calculation determines the additional cost applied to late invoice payments based on the outstanding amount, annual interest rate, and number of days the payment is overdue.

2. How Does the Calculator Work?

The calculator uses the following equation:

Where:

• \( Invoice\ Amount \) — Original amount due on the invoice (USD)
• \( Rate \) — Annual late payment rate (decimal)
• \( Days\ Late \) — Number of days payment is overdue

Explanation: The formula calculates the proportional charge based on how many days the payment is late relative to a full year.

3. Importance of Finance Charge Calculation

Details: Accurate finance charge calculation is crucial for maintaining cash flow, compensating for delayed payments, and enforcing payment terms consistently.

4. Using the Calculator

Tips: Enter the original invoice amount in USD, the annual late rate as a decimal (e.g., 0.12 for 12%), and the number of days the payment is late. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Is this calculation method legally compliant?
A: This is a standard method, but always check local regulations as maximum rates and calculation methods may be regulated.

Q2: Should I use 365 or 360 days for the calculation?
A: 365 days is standard, but some industries use 360 days. Check your contract terms.

Q3: How often should finance charges be applied?
A: Typically calculated daily but applied monthly. Specifics should be outlined in your payment terms.

Q4: Can I charge compound interest on late payments?
A: Only if specified in your contract terms. This calculator uses simple interest.

Q5: What's a typical late payment rate?
A: Rates vary but often range from 1-2% per month (12-24% annually). Some jurisdictions limit maximum rates.