How to calculate and apply default interest
Introduction
A client doesn't settle their invoice on time? Beyond the simple inconvenience, each day of delay represents a cost to your cash flow. Fortunately, Swiss legislation authorises you to charge default interest to compensate for this financial loss.
This interest constitutes a legitimate payment penalty that aims to compensate the creditor for the payment delay. But between the right to claim it and its practical application, many questions arise: what rate to apply? From when? How to calculate it exactly? Should it be mentioned in your general terms and conditions?
This guide explains everything you need to know to calculate and apply default interest in Switzerland. You'll find the calculation formula, concrete examples with different scenarios, the practical steps to invoice it and the legal precautions to respect. You'll also discover how to handle VAT on this interest and how to integrate these clauses into your invoicing processes.
Objective: protect your cash flow and recover what is owed to you, in full compliance with Swiss legislation.
📌 Summary (TL;DR)
Default interest is a legal penalty that you can charge when a client doesn't pay within the agreed timeframe. The legal rate in Switzerland is 5% per annum, but you can specify a different rate in your general terms and conditions. The calculation is done according to the formula: (Amount due × Interest rate × Number of days late) ÷ 360.
To charge it, issue a formal notice then a separate invoice. Default interest is not subject to VAT. Systematically integrate a clause in your general terms and conditions to facilitate its application.
📚 Table of contents
What is default interest?
Default interest is legal interest that you can claim from a client who doesn't pay their invoice within the agreed timeframe. It compensates for the financial loss caused by the payment delay.
In Switzerland, the legal framework is defined by Article 104 of the Code of Obligations (CO). The legal rate is set at 5% per annum, unless you have specified a different rate in your general terms and conditions.
Not to be confused with compensatory interest, which concerns other types of claims. Default interest applies specifically to payment delays on invoices.
To learn more about practical application, consult our guide on late payment interest.
When can you charge default interest?
You can charge default interest as soon as your client is in default, that is to say late in payment according to legal conditions.
Two main situations:
- Fixed deadline exceeded: If your invoice mentions a specific payment date (e.g. "Payment within 30 days"), interest runs automatically from the day after this date
- Formal notice required: Without a specific deadline on the invoice, you must first send a formal notice to the client
The essential: always specify the payment terms clearly on your invoices (deadline, due date). This greatly simplifies the application of default interest in case of delay.
How to calculate default interest: the formula
The calculation formula for default interest is standardised and simple to apply:
(Amount due × Interest rate × Number of days late) ÷ 365
Detail of each element:
- Amount due: The total amount of the unpaid invoice (VAT included if applicable)
- Interest rate: 5% (Swiss legal rate) or the rate specified in your general terms and conditions
- Number of days late: From the day after the due date until actual payment
- 365: Number of days in the year to calculate daily interest
The starting point of the calculation: the day following the due date mentioned on your invoice.
Concrete calculation examples
Nothing better than numerical examples to understand the calculation of default interest. Here are three common scenarios you might encounter in your business.
These examples use the standard formula and show how amounts vary according to the amount due, the length of delay and the rate applied.
All calculations are rounded to two decimal places to simplify invoicing.
Example 1: Invoice of 5,000 CHF with 30 days late
Your client owes 5,000 CHF and pays 30 days late. You apply the legal rate of 5%.
Calculation:
(5,000 × 0.05 × 30) ÷ 365 = 20.55 CHF
You can therefore charge 20.55 CHF in default interest to compensate for this one-month delay. This amount may seem modest, but it represents an important principle: respecting payment deadlines.
This interest is added to the principal amount of 5,000 CHF, for a total of 5,020.55 CHF to claim.
Example 2: Invoice of 12,500 CHF with 60 days late
Higher amount, longer delay: your client owes 12,500 CHF and pays 60 days late. Legal rate of 5%.
Calculation:
(12,500 × 0.05 × 60) ÷ 365 = 102.74 CHF
The default interest increases proportionally: higher amount and doubled duration multiply the financial impact of the delay.
With 102.74 CHF in interest, the total amount to claim rises to 12,602.74 CHF. An amount that fully justifies charging this interest.
Example 3: Application of a contractual rate of 8%
You have specified a rate of 8% in your general terms and conditions. Invoice of 8,000 CHF, 45 days late.
Calculation with contractual rate (8%):
(8,000 × 0.08 × 45) ÷ 365 = 78.90 CHF
Comparison with legal rate (5%):
(8,000 × 0.05 × 45) ÷ 365 = 49.32 CHF
The difference: 29.58 CHF additional with the contractual rate. This shows the advantage of specifying a higher rate in your general terms and conditions, within reasonable limits to avoid any risk of usury.
How to invoice default interest in practice
Calculating default interest is one thing, invoicing it correctly is another. Here is the procedure to follow to claim this interest in a professional and compliant manner.
The process generally takes place in three stages: the formal notice, the issue of the interest invoice, and the integration of preventive clauses in your general terms and conditions.
Each stage is important to maximise your chances of recovery.
Writing a formal notice
The formal notice is often the first formal step towards recovery. It must be clear and firm, without being aggressive.
Elements to include:
- Reference of the unpaid invoice and amount due
- Initial due date exceeded
- New payment deadline (generally 10 to 15 days)
- Explicit mention of default interest that will be charged in case of non-payment
- Consequences in case of no response (recovery procedure)
Recommended tone: professional and firm, but courteous. Send this formal notice by registered post to keep proof.
Issuing a default interest invoice
Once the delay is confirmed, create a separate invoice specifically for default interest.
Mandatory mentions:
- Clear reference to the initial unpaid invoice
- Calculation period (start and end dates of the delay)
- Interest rate applied (5% or contractual rate)
- Calculation detail for transparency
- Important: No VAT on default interest
Default interest is not subject to VAT because it constitutes compensation, not a service provision. To learn more about VAT and invoicing.
Integrating interest in your general terms and conditions
The best strategy: prevention rather than cure. Clearly mention the conditions for applying default interest in your general terms and conditions of sale.
Standard clause:
"In case of payment delay, default interest at the rate of [X]% per annum will be charged from the day after the due date, without prior formal notice."
You can specify a rate higher than the legal rate of 5%, but remain reasonable (generally between 5% and 10%) to avoid any risk of an abusive clause.
This clause must be visible and accepted by the client before the service.
Default interest and VAT: what you need to know
Crucial point: default interest is NOT subject to VAT. This is an important rule to know to avoid errors in your invoices and declarations.
According to the Federal Tax Administration (FTA), default interest constitutes compensation to offset a financial loss, not a service provision or delivery of goods. It is therefore not part of taxable turnover.
In practice:
- Invoice default interest without adding VAT
- Do not include it in your VAT declaration
- The principal amount of the invoice remains subject to VAT according to usual rules
To understand VAT declaration methods, consult our article on VAT according to invoice or payment.
Limits and legal precautions
Charging default interest is a right, but there are limits and precautions to respect to remain within the legal framework.
Maximum rate: Avoid abusive rates. An excessively high rate (beyond 10-12%) could be considered usury and be cancelled by a court.
Documentation: Keep all documents proving the delay: original invoice with due date, reminders sent, formal notice. This evidence is essential in case of dispute.
Formal notice: In certain cases (invoice without specific due date), a formal notice is mandatory before being able to charge interest.
Reminder fees: Default interest does not cover administrative reminder costs, which can be invoiced separately (generally 20-40 CHF per reminder).
For significant or complex claims, consult a lawyer specialising in debt recovery before initiating a procedure.
Default interest is a legal tool at your disposal to compensate for payment delays and encourage your clients to respect deadlines. The legal rate of 5% applies automatically from the due date, but you can specify a different rate in your general terms and conditions. The calculation formula remains simple: amount × rate × days late ÷ 360.
To be effective, integrate a clear clause in your general terms and conditions, mention it on your invoices and don't hesitate to send a formal notice before charging interest. Remember that this interest is not subject to VAT and must remain proportionate to be applicable.
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