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If a client delays payment on your invoice, U.S. law may entitle you to statutory interest on the overdue amount. This interest compensates for the time your funds were withheld. Understanding when and how to apply statutory interest ensures compliance and aids in maintaining healthy cash flow.
This guide explains the concept of statutory interest, when it applies, and how to calculate it, and it provides practical examples.
Table of contents:
Statutory interest is the rate set by law that a creditor can charge on overdue payments. In the U.S., this rate varies by jurisdiction and the nature of the debt. For instance, federal contracts are governed by the Prompt Payment Act, while state laws dictate rates for other types of debts.
Understanding the applicable statutory interest rate is crucial, as it ensures that any interest charged is legally compliant and justifiable.
Contractual interest is the interest rate that two parties agree upon in a written contract, such as payment terms or loan agreements. This rate must comply with state usury laws, which limit how much interest can legally be charged. Unlike statutory interest, contractual interest gives businesses more flexibility but also requires careful documentation.
In short, statutory interest is legally imposed; contractual interest is privately negotiated—both can apply depending on the nature of the agreement and the governing law.
You can charge statutory interest when:
It’s essential to review the relevant laws or consult legal counsel to ensure compliance when charging statutory interest.
The general formula for calculating simple statutory interest is: Interest = principal x rate x (days late / 365).
Principal: the overdue amount.
Rate: the annual statutory interest rate (expressed as a decimal).
Days late: number of days the payment is overdue.
Example:
If a $1,000 invoice is 30 days late, and the applicable interest rate is 4.625%:
Interest = $1,000 x 0.04625 x (30 / 365) ≈ $3.80
For federal contracts, you can use the Prompt Payment Interest Calculator provided by the Bureau of the Fiscal Service.
Payt’s accounts receivable software helps businesses get invoices paid up to 50% faster. By automating payment reminders, applying statutory interest correctly, and giving you clear insight into outstanding invoices, you can prevent unnecessary payment delays.
With Payt, you’ll spend less time chasing payments while maintaining a professional and customer-friendly communication flow. This keeps client relationships strong—and cash flow healthy.
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You calculate compound statutory interest when an overdue payment remains unpaid for more than one year. In this case, interest is added to the principal annually, and the new total becomes the base for the following year—allowing the amount owed to grow incrementally over time.
Example:
Principal: $1,000
Statutory interest rate: 6% per year
Duration of delay: 2 years
Method: Compound interest starts applying in year 2
Year 1 – Simple interest
Interest = $1,000 × 6% = $60
New principal for year 2 = $1,000 + $60 = $1,060
Year 2 – Interest on interest
Interest = $1,060 × 6% = $63.60
