Interest expense is the cost a company incurs when borrowing money. It represents the interest payable on any form of debt—such as loans, bonds, credit lines, or other financing arrangements—and is recorded as an expense on the income statement. This cost arises from a company’s obligation to compensate lenders for the use of their funds over time.

For example, if a business takes out a $100,000 loan at an annual interest rate of 5%, it will incur $5,000 in interest expense per year (assuming simple interest). This expense does not reduce the principal balance but reflects the cost of financing.

Interest expense is considered a non-operating expense, meaning it is not directly tied to the company’s core operations. However, it still affects net income, as it is subtracted after calculating operating profit (EBIT).

Managing interest expense is important for financial health. Excessive debt or high interest costs can reduce profitability and cash flow, while well-managed financing can support growth. Companies must also consider interest coverage ratios, which measure their ability to pay interest from earnings—an important metric for investors and creditors evaluating financial risk.

In summary, interest expense reflects the cost of borrowed capital and plays a key role in a company’s financial structure and performance.