How Business Line-of-Credit Interest Actually Works

One of the most appealing features of a business line of credit is that interest accrues only on the portion you draw, not the full limit. But understanding exactly how that interest is calculated — and what other costs might apply — is important before you commit to a facility. This guide walks through the mechanics clearly.

Daily vs. monthly interest calculation

Most business lines of credit accrue interest daily. The lender takes your annual interest rate (APR), divides it by 365 to get a daily rate, then applies that daily rate to the current outstanding balance. If you draw $50,000 at a 12% annual rate, the daily interest charge is approximately $16.44. Over a 30-day period that is roughly $493. As you repay principal, the outstanding balance shrinks and your daily interest charge drops accordingly. Some lenders calculate interest monthly rather than daily — the end result is similar but the timing of charges can differ slightly.

Fixed vs. variable rates

Lines of credit are frequently offered with variable interest rates tied to a benchmark — historically the prime rate or LIBOR, and now more commonly SOFR (Secured Overnight Financing Rate) in the United States. A lender might quote prime plus 4%, meaning if the prime rate is 8.5%, your rate is 12.5%. When the benchmark moves, your rate and therefore your interest cost moves with it. Fixed-rate lines of credit exist but are less common; they provide payment certainty in exchange for a slightly higher starting rate. If you are drawing heavily during a period of rising rates, a variable rate can increase your cost meaningfully.

Draw fees and origination costs

Beyond the interest rate, several fee structures are common with business lines of credit. An origination fee (sometimes called an establishment fee) is charged upfront when the line is opened, typically 0.5–2% of the credit limit. A draw fee is charged each time you pull funds — often a flat dollar amount ($25–$100) or a small percentage of the draw. An annual maintenance or renewal fee keeps the line active year over year, even if you never draw. Each of these fees adds to the true cost of the credit facility. When comparing lenders, convert all fees into an annualized percentage of your expected usage to make an apples-to-apples comparison.

Non-utilization fees

Some lenders charge a non-utilization fee (sometimes called an availability fee or commitment fee) on the portion of the line you have not drawn. If you have a $200,000 line and only draw $50,000, the lender may charge a small annual fee — typically 0.25–0.5% — on the unused $150,000. This compensates them for reserving capital against your potential draws. Not all lenders charge this; if you plan to use the line as an emergency backstop but rarely draw from it, ask specifically whether a non-utilization fee applies.

Minimum payment vs. paying down principal

Unlike a term loan, a line of credit may require only a minimum monthly payment — sometimes interest-only. Paying only the minimum keeps your account current but does not reduce your principal. If you draw $80,000 and pay only the monthly interest, your outstanding balance stays at $80,000 and continues to accrue interest at the same rate indefinitely. Paying down principal actively reduces your cost and restores availability. Treat a line of credit as short-term working capital — aim to cycle through the balance rather than maintain a large, persistent draw.

Illustrative cost example

Consider a $100,000 line at a 14% annual variable rate. You draw $40,000 on day one, hold it for 45 days, then repay $25,000 and hold the remaining $15,000 for another 30 days before repaying in full. Rough interest cost: $40,000 x (14%/365) x 45 days = approximately $691, plus $15,000 x (14%/365) x 30 days = approximately $173. Total interest: around $864. A term loan of $40,000 at the same rate over 12 months would carry total interest of roughly $3,060 — reflecting the much shorter average outstanding balance the line provides. This illustrative comparison is not an offer and does not include fees.

What to look for when comparing offers

• —Annual percentage rate (APR) — the fully loaded rate including fees, not just the stated interest rate.
• —Whether the rate is fixed or variable, and what benchmark it tracks.
• —Draw fees, origination fees, and annual maintenance fees.
• —Whether a non-utilization fee applies and at what percentage.
• —Minimum payment requirements — interest-only, or minimum principal repayment.
• —Prepayment penalties — are there costs if you repay the drawn balance early?

Indicative figures only — not a commitment to lend or an offer of any specific rate.