Interest Methods (30/360 vs ACT/365): How to Pick and Model Them Correctly

⚡ Quick Summary

• Interest methods determine how much you actually pay on loans, revolvers, and bullets – small differences compound over time.
• 30/360 approximates each month and year; ACT/365 (or ACT/360) uses exact days. Choose based on contracts, not convenience.
• Implement interest methods as a separate layer in your business debt schedule, not embedded inside long formulas.
• Use standardised inputs for base rate, margin, and day‑count so your debt service schedule in Excel is easy to audit.
• Align interest timing with your cash flow model, covenant tests, and headroom projections.
• Consistency across loans, revolvers, bullets, and vendor financing keeps your financing and debt story credible.
• If you’re short on time, remember this: pick the method the contract specifies, abstract it into a driver, and never hard‑code it into individual facility formulas.

💡 Introduction: Why This Topic Matters

Interest methods look like a minor technicality until you reconcile modelled interest to lender statements, and the numbers don’t match. When that happens, confidence in your business debt schedule vanishes. For operators juggling term loans, revolvers, and bullets, getting 30/360 vs ACT/365 right is essential. It affects your P&L, tax, and covenants, as well as comparisons between vendor terms and bank debt. This guide explains how to translate legal language into model logic, implement interest methods as configurable drivers, and connect them directly to your debt schedule and cash flow. For CFOs and finance teams, that means cleaner financing and debt models, faster closes, and fewer late‑night conversations with auditors or lenders about “mysterious” interest variances.

🧩 A Simple Framework You Can Use

Think in three layers.

First, interpret the contract: identify base rate, spread, day‑count, reset frequency, and compounding rules.

Second, convert this into structured assumptions that sit alongside each facility in your business debt schedule – not buried in formulas.

Third, write a single interest engine that takes opening balance, rate, and day‑count to produce interest for each period.

By separating “what the contract says” from “how the model calculates,” you can support multiple methods, switch conventions where needed, and keep the debt service schedule in Excel coherent across facilities. This framework makes it easy to layer in more advanced elements, like fees and covenants, without compromising clarity in your financing and debt model.

🛠️ Step-by-Step Implementation

Step 1: Capture Contract Terms and Day-Count Rules

Start by cataloguing every facility’s legal terms. For each loan, revolver or bullet, capture the base rate (e.g. SOFR), margin, reset frequency, compounding rules and specified day‑count method. Note whether the facility uses 30/360, ACT/365 or ACT/360, and whether interest is paid in arrears or in advance. Store this alongside each facility in your debt schedule, ideally in a clean assumptions table. This is also the moment to confirm whether vendor financing or vendor finance for business uses different methods from bank lines. Once you have this inventory, you can see where methods are inconsistent and where modelling simplifications might hide real risk. The goal is simple: every interest cash flow in your financing and debt model should trace back to a specific contract clause that you can show to lenders or auditors.

Step 2: Build a Reusable Interest Engine

Next, write a single calculation block that turns balance, rate and day‑count into interest for any period. Take the opening balance, apply the annual rate (base + margin), then scale by days in period divided by days in year, using the method specified (30/360 or ACT/365). Keep this logic in its own section of your debt service schedule in Excel, not scattered across rows. Feed it from the assumptions table and send outputs back to the business debt schedule. This pattern allows you to test different day‑counts quickly and to understand how much of your interest spend is method‑driven versus rate‑driven. It also means that when a facility is refinanced or moved from bank to vendor financing solutions, you can change the method once and trust that the entire financing and debt model updates correctly.

Step 3: Align Interest Timing with Cash Flow and Covenants

Interest isn’t just an expense line; it’s a cash event. Align your interest engine with your 13‑week headroom view so you can see when cash leaves the bank. For each facility, specify the payment schedule (monthly, quarterly, semi‑annual) and create separate lines for accrual and cash payment. Accrual feeds the P&L; cash payment feeds the financing section of your cash flow forecast. This separation is crucial when combining multiple loans, revolvers and vendor financing lines. Map interest coverage ratios and minimum cash covenants to the same periods so your tests reflect the right cash timing. When interest methods differ across facilities, this framework keeps comparisons apples‑to‑apples and ensures your business debt schedule tells a coherent story to boards, lenders and investors.

Step 4: Test Method Sensitivity and Edge Cases

Once your engine works, test how sensitive outcomes are to the chosen method. Clone a scenario where all facilities use 30/360, then another with ACT/365, and compare the lifetime interest and covenant headroom. For short‑dated or heavily drawn revolvers, the impact can be material. Pay special attention to facilities with irregular periods (stub periods, early repayments, or compounding quirks). Use stress tests to see how financing and debt metrics behave under rate shocks and different day‑count rules. This is also a good time to check how interest interacts with fees, OID and prepayment penalties. By quantifying these effects, you can explain to management and lenders why a particular method is preferable, and ensure your debt schedule template won’t break when facilities are renegotiated or refinanced.

Step 5: Integrate with Decision-Making and Reporting

Finally, embed interest method choices into your decision workflows. When evaluating new facilities or vendor terms and bank debt alternatives, model each structure with its actual day‑count and compare total cash paid, covenant headroom and P&L volatility. Feed these outputs into your budgeting & forecasting process so interest assumptions stay aligned with the rest of your planning. For lender packs, create views that reconcile interest from the business debt schedule to facility statements. When you standardise how interest is modelled, you can layer on more advanced analytics, such as scenario‑based refinancing or multi‑facility optimisation, without revisiting basic mechanics. In short, the interest engine becomes a reusable asset across projects, investments and capital structure decisions, not just a technical detail in your debt service schedule in Excel.

🌍 Real-World Examples

A regional infrastructure operator had multiple term loans and revolvers from different lenders. Some contracts used 30/360, others ACT/365, and one piece of vendor financing used ACT/360. Their old model assumed 30/360 across the board, causing persistent variances to lender statements and confusion in board packs. By implementing a central interest engine and properly tagging methods per facility, they reconciled to the center and regained trust in their business debt schedule. They also ran scenarios showing how method changes would affect future interest and coverage ratios. When a refinancing opportunity arose, they could compare total cash cost under different interest structures, not just headline rates. The team then extended the same engine into their 13‑week headroom model and budgeting process, turning a technical fix into a strategic financing and debt capability.

⚠️ Common Mistakes to Avoid

The most common mistake is assuming one interest method for all facilities because “it’s easier.” That shortcut might be fine for a first pass, but it quickly breaks once you reconcile to real statements. Another trap is baking day‑count logic into dozens of cell‑level formulas in your debt service schedule in Excel, making changes slow and error‑prone. Some teams ignore irregular periods or capitalised interest, which leads to under‑ or overstated balances and misstated covenants. Others overlook how vendor terms and bank debt differ in day‑count, masking the true cost of vendor financing. Avoid these issues by centralising day‑count logic, tying every method to contract language, and validating results against actual lender calculations. When your engine is clean, you can focus on real capital structure decisions instead of debugging spreadsheets.

❓ FAQs

🚀 Next Steps

With a clean interest engine in place, extend it into other parts of your modelling stack. Connect it to your multi‑facility debt schedule template, 13‑week headroom forecasting, and budgeting cycles. Use it to compare vendor terms and bank debt when evaluating new facilities, and to support decision packs for refinancings. As your portfolio grows, the same engine can power project evaluation, investment modelling, and scenario analysis without re‑work. The result is a single source of truth for interest across all your financing and debt decisions. That consistency reduces errors, speeds up reporting, and gives management a clearer understanding of the true cost of capital across every facility on the balance sheet.