Interest on receivables, also known as receivable interest or late payment interest, refers to the additional amount charged or earned when a customer or client delays payment for goods or services beyond the agreed-upon payment terms. In business transactions, it’s common for companies to provide credit terms to their customers, allowing them a certain period to pay for the products or services they’ve received.
If a customer fails to make the payment within the stipulated time frame, the supplier or service provider may charge interest on the overdue amount as compensation for the delay. This interest is typically calculated as a percentage of the outstanding balance and accrues over the period of delay until the payment is made.
The specific terms regarding interest on receivables, including the interest rate and the grace period before interest accrues, are usually outlined in the initial agreement or contract between the buyer and the seller. It serves as a financial incentive for timely payments and helps compensate the seller for the opportunity cost of not having the funds available when they were initially due.