What is interest expense?

Interest expense is the cost a business incurs for borrowed money. It appears on the income statement as a non-operating expense, reducing net income. Interest expense includes interest on loans, lines of credit, credit cards, equipment financing, and any other debt instruments. It is generally tax-deductible, reducing taxable income.

Calculating the effective interest rate

The stated rate on your loan is not always the true cost. Add origination fees, annual fees, and required compensating balances to calculate the effective rate. A 7% loan with 2% origination fees and $5,000 in required deposits costs more than stated. Compare effective rates when evaluating financing options.

Interest expense and profitability analysis

Separate interest expense from operating expenses when analyzing profitability. Operating margin shows how well the core business performs. Net margin after interest shows the impact of financing decisions. A highly leveraged firm might have strong operating margins but thin net margins due to interest burden. Track both metrics.