What is Accrued Interest?

Accrued interest is interest that has built up on a debt since the last payment, owed but not yet paid.

How does accrued interest work?

Interest accumulates daily even when payments happen monthly or at maturity. Borrow $100,000 at 8 percent and the loan quietly grows about $22 a day. On the books, accrual accounting records that expense as it builds, not when the check clears.

Why does accrued interest matter?

For founders, it shows up in convertible notes. Most notes accrue 2 to 8 percent interest, and that interest usually converts into extra shares for the investor at the next round. Wait two years to raise and the note buys more of your company than you remembered selling.

Where did accrued interest come from?

Lending is older than money itself; interest shows up in Babylonian records. The accounting concept is just accrual logic applied to debt: recognize the cost as time passes, because time is what you’re renting.

How do you handle accrued interest well?

Model it before you sign. Know whether your note’s interest converts to equity or gets repaid, track the running total, and remember SAFEs skip interest entirely. That’s one reason founders like them.

Bottom line: accrued interest is rent on borrowed time. Know the meter is running.

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