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Definition
Compounding frequency determines how often interest is capitalised onto the principal. Daily compounding (common on overdrafts and some revolving facilities) is the most expensive for a borrower at the same nominal rate; annual compounding the least. It is what separates the nominal rate from the effective annual rate.
In plain terms
The more often interest gets rolled up, the faster a debt grows or a saving builds. A 12% nominal rate compounded daily costs noticeably more than the same 12% compounded once a year.
Why it matters for your company
On any variable or revolving facility, ask how often interest compounds — it materially changes the cost of carrying a balance. See how compounding frequency changes borrowing cost.
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Read →Funding for UK limited companies
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