Set up interest rates for an interest code
Interest codes contain settings that determine when interest is charged and how it is calculated on overdue accounts.
To set up interest codes go to Credit and collections > Interest > Set up interest codes
You can set up a single interest code and apply it to multiple customer posting profiles, billing codes, or to specific invoice lines. When the interest code details are changed, all features that use the code will automatically implement the changes on new transactions. For each interest code, you can set up two types of rates:
- Rates for interest earnings − Represent revenue that is earned by charging interest on invoices or interest notes.
- Rates for interest payments − Represent a cost that is paid for interest on credit notes.
Both rate types can exist at the same time and in the same interest code. Interest rates can be based on three following calculation types.
- Interest by percentage
- Interest by amount
- Interest by range, which results in a single percentage or amount
When an interest code is used to calculate interest, a separate interest note is created for each interest rate that is in effect during the time that the payment has exceeded the transaction due date. You can use the Earnings tab on the Interest code page to set up interest rates for interest that you earn by charging interest. Use the Payments tab to set up interest rates for interest that you pay.
The following list shows available fields in the Earnings tab.
Calculate interest every – Enter the unit of time and select the period to use to specify when interest is calculated:
- Day - Calculate interest each day; interest for partial months is calculated at a rate of 1/30 of the monthly interest for each day
- Month - Calculate interest on the first day of each month; interest is calculated as 1/1 of the monthly interest rate
- Calendar day - Calculate interest each day; interest for partial months is calculated at a rate of 1/Number of days in the month of the monthly interest for each day.
Interest by range – Select the type of range to use in the Customer interest range page:
- None - Interest rate is always the same, regardless of the invoice amount or the number of days or months that have accrued since the invoice was due. If you select this option, the Ranges button is not available.
- Amount - Interest rate changes as the invoice amount changes.
Monthly interest % – Enter the percentage to use in the interest calculation. This amount must be greater than 0 (zero). This field is not available if Amount, Days, or Months are selected in the Interest by range field.
Interest rates based on a percentage
You can set up interest rates that calculate a specified percentage.
- Interest amount applies to all currencies.
- Optional interest amount limits can be entered.
- Percentage is selected in the Calculate interest based on field on the Set up Interest codes page.
For example, to set up an interest code that assesses 5 percent interest for every two months that the invoice payment exceeds the transaction due date, you would enter 2 in the Calculate interest every field and select Month.
Interest rates based on amounts
You can set up interest rates that calculate a specified amount for each currency.
- An interest amount is specified for each currency in the interest code.
- Optional interest amount limits can be entered.
- Amount is selected in the Calculate interest based on field on the Set up Interest codes page.
For example, to set up an interest code that assesses interest of 25.00 for every 20 days that the invoice payment exceeds the transaction due date, you would enter 20 in the Calculate interest every field and select Day.
Interest rates based on ranges
You can set up interest rates that vary depending on the overdue amount, the number of days that the amount is late, or the number of months that the amount is late.
- You can use the Earnings by Currency tab to define specific interest settings for each currency. This is also where you will define the range.
- Use the Ranges button to add lines that represent the ranges that you want to set up. The From value represents the beginning of the range and the Interest value number represents either a percentage or an amount, depending on the selection in the Calculate interest based on field on the Set up Interest codes page.
Interest rates based on number of days between due and payment date
If a company provides a client with products or services under the terms of the trade agreement and you have not obtained their payment by the negotiated date, you are entitled to obtain interest and compensation for your payment. The interest measurement is based on traditional practices.
A formula of the rate, either annual or monthly, converted to daily rates, multiplied by the number of days passed between the due date and the settlement date (or the date on which the computation is made, if the payment hasn't been made) can be used to calculate interest.
This procedure extends to all your trade with other companies, including sole traders, provided that they operate in their independent economic or professional activities and with public authorities.
Example 1: Interest by range = Amount
You can set up an interest code that assesses interest one time for every three months that the invoice payment exceeds the transaction due date. You need to base the calculation on a percentage interest value, according to stepped amount intervals. The interest value will be 1 percent for invoice amounts up to 1,000.00, 2 percent for amounts from 1,001.00 to 5,000.00, and 3 percent for amounts larger than 5,000.00.
You can set up the Interest code fields with the following values:
- Interest code - 3M%ByAmt
- Calculate interest every - 3/Month
- Interest by range – Amount
- Calculate interest based on - Percentage
Set up the range information as follows.
| From value | Interest value |
|---|---|
| 0 | 1 |
| 1,001 | 2 |
| 5,001 | 3 |
Example 2: Interest by range = Days
You can set up an interest code that assesses interest one time for every 15 days that the invoice payment exceeds the transaction due date. You need to base the calculation on an amount interest value, according to stepped day intervals. The interest value will be 10.00 per 15 days during the first 60 days, 15.00 per 15 days during days 61 to 90, and 20.00 per 15 days from day 91 and after.
You can set up the Interest code fields with the following values:
- Interest code - 15DAmtXDay
- Calculate interest every - 15/Day
- Interest by range – Days
- Calculate interest based on - Amount
Set up the range information as follows.
| From value | Interest value |
|---|---|
| 0 | 10 |
| 61 | 15 |
| 91 | 20 |
Example 3: Interest by range = Months
You can set up an interest code that assesses interest one time for every month that the invoice payment exceeds the transaction due date. You need to base the calculation on a percentage interest value, according to stepped month intervals. The interest value will be 1.5 percent per month for the first three overdue months, 2.0 percent per month for the second three months, and 2.5 percent per month for each month beyond the first six months. You can set up the Interest code fields with the following values.
- Interest code - 1M%ByMth
- Calculate interest every - 1/Month
- Interest by range – Months
- Calculate interest based on – Percentage
Set up the range information as follows.
| From value | Interest value |
|---|---|
| 0 | 1.5 |
| 4 | 2 |
| 7 | 2.5 |
New versions
Interest codes are date effective. If you want to modify the interest rate, you can create a new version that is effective as of a future date.
To view different versions, you can use the As of Date menu choice to select the cutoff date. You can also select the Display all records to view all interest codes in the page.