Interest

What is interest?

Interest is the price of using someone else's money. When you borrow, you pay interest to the lender. When you save or invest, you earn interest from the institution holding your money. It's typically expressed as an annual percentage rate (APR), though it may be calculated monthly or daily.

For small business owners, interest appears both as an expense (on loans and credit cards) and sometimes as income (on business savings).

Interest as a business expense

Common sources of interest expense include:

• Business loans — Equipment financing, lines of credit, SBA loans
• Credit cards — Carrying a balance on business credit cards
• Vehicle financing — Loans for work trucks or vans
• Late payment interest — Penalties for overdue bills

Interest paid on business debt is generally tax-deductible.

Charging interest to clients

Some contractors charge interest on overdue invoices, typically 1-2% per month. This must be disclosed upfront and comply with state usury laws. Many businesses use flat late fees instead, which are simpler to administer.