GPI 442 – Analyze your company’s interest expense each month and understand the pieces that comprise this monthly cost.

On your financial statements, your interest expense account may have a number of items included. Take the time to understand what you are being billed for each month and you might be able to help save some money.

Items included in interest expense on the income statement:

• Loan Interest: Capital loan payments are amortized over a number of years.  There is a part of the loan payment that represents a payment down on the remaining loan balance. The rest of the monthly payment is interest expense for a business. This portion goes on the income statement to interest expense. These amounts change slightly (interest portion declines as loan payment portion increases over the loan), but overall will be about the same over several years assuming new loans are taken on and old ones paid off and capital spending is not leveling off or increasing.
• New loan fees: New loan payments have one time loan fees paid out the first month. These costs are normally charged and included into interest expense. These payments are normally what the representative is paid from on a new loan.
• LOC interest: Lines of credit (LOC) interest charges are expensed in interest expense.  If your company has a line of credit, most of the time, only interest is charged on the loan and that is added to the outstanding loan balance. Normally loan payments are not arranged since all of the incoming cash receipts (wires, checks, ACH wires, bank drop deposits, drive-thru deposits) are all used to pay down the LOC (line of credit) as cash is received. This is in exchange for the bank advancing monies (up to your LOC limit) on accounts receivable credit invoices.  (For example, the bank advances 80% of the company invoice upfront as it is mailed to the customer granted credit. 30 to 60 days later, the entire 100% of the invoice arrives in the form of a payment from the customer and it is automatically taken by the bank (requirement of the loan) and used to pay down the line of credit. This is an example of a LOC with AR accounts receivable advances).
• Lockbox and service fees: Service fees charged by your bank are included in this expense category. This is to pay a fee for all checks cleared by your bank through your assigned lockbox (gathering place for all mailed incoming customer check payments).  Banks may charge you fees to clear your accounts payable checks to your vendors and charge you other processing fees for things such as your wire transfers made online or for you making ACH payments on the bank’s corporate website run for businesses.
• Penalty fees: Sometimes late charges for late loan payments are charged here.  They should be charged to penalty expenses for late fees.  These costs occur when payments on scheduled loans per the amortization schedule are paid late or the checks sent are lost in the mail or arrive late. The finance company charges penalty fees for receiving these scheduled payments late. Re-class these properly to penalty expenses.