Try the math
What a business line of credit costs.
You pay interest on the balance you have drawn, not on the limit. Put in a draw, a rate and how long it takes to repay.
The rate is a starting point, not a quote. If somebody has quoted you one, put it in and see what it costs.
The arithmetic
- You draw
- $20,000
- Illustrative rate
- 24% a year
- Repaid over
- 6 months
- Monthly payment
- $3,571
- Total repaid
- $21,423
- Interest paid
- $1,423
Illustration, not a quote. A partner sets the real rate, and a draw fee or a fee to keep the line open can sit on top.
See my optionsBefore you sign
Ask what it costs to keep the line open when you are not drawing, and whether the rate is fixed or moves.
How a business line of credit works, in fullA worked example
The starting position, written out.
Say you draw $20,000 against the line to buy materials for a job already sold, at an illustrative rate of 24% a year, and clear it over six months in level payments.
Interest runs on the balance you have drawn, not on the limit, and the balance falls every month, so the first month’s interest is $400 and the last month’s is a fraction of that. Repay in three months and the interest roughly halves. Leave it drawn for a year and it roughly doubles. The rate is only half of what a draw costs; the other half is how long you leave it out.
Illustration, not a quote
- You draw
- $20,000
- Illustrative rate
- 24% a year
- Repaid over
- 6 months
- Monthly payment
- $3,571
- Total repaid
- $21,423
- Interest paid
- about $1,400
Nobody has offered you these terms. The figures are the calculator's own arithmetic at its starting position; real terms come from a funding partner.
How to read the result
What the numbers are telling you.
The months are yours to choose
A line has no fixed term, which is why the calculator asks for one. The months slider is a promise you make to yourself about when the job pays and the draw goes back. Set it to when the money actually comes in, not to when you would like it to.
Interest-only is a different picture
Some lines ask only for the interest each month and leave the balance to you. On this example that is $400 a month with the $20,000 still owed at the end. It looks cheap month to month and it is the most expensive way to run a line, because the balance never falls.
What the arithmetic leaves out
A fee per draw, a fee to keep the line open, an origination fee at the start, and a rate that moves with a benchmark can each sit on top of the interest shown. None is in the calculator because none is mine to predict. Ask for all four before you sign, and put the answers in as a higher rate to see what they do.
Questions
About the arithmetic.
The questions about a business line of credit itself, and what a funding partner may look at, are on its page.
Business line of credit, in fullWhy does the calculator ask how long, when a line of credit has no fixed term?
Because the cost of a draw depends on how long it stays drawn, and only you know that. The calculator treats a draw like a small loan repaid in level payments over the months you choose. Set the months to when the job pays. If you are not sure, run it twice: once at your best guess and once at double that.
What if I only pay the interest each month?
Then the balance never falls and the interest never shrinks. On the example, $20,000 at 24% is $400 a month, every month, with the $20,000 still owed. Over a year that is $4,800 against about $1,400 for the six-month level repayment. Illustration, not a quote; the point is that an interest-only line is only cheap if you clear it fast.
Does interest run on the whole limit?
No. It runs on what you have drawn. A $50,000 line with $20,000 drawn costs interest on $20,000. A fee to keep the line open, if there is one, is charged on the line whether you draw or not, which is why the "before you sign" question on this page is about that fee.
Is the rate fixed?
Some lines are fixed and many move with a benchmark rate. The calculator holds the rate still because it cannot know which you will be offered. If the rate moves, a draw you expected to clear in six months can cost more than the first month suggested. Ask whether it is fixed, and if it moves, what it moves with.
How does this compare with an advance for the same job?
The same $20,000 as a merchant cash advance at a factor of 1.30 costs $6,000 whether you clear it in two months or eight; the line at 24% over six months costs about $1,400. That is not a claim that you will be offered either, and a line early in a business’s life often is not on offer. It is the reason to ask for the cheaper shape first and read the answer honestly. The line-of-credit page has the full comparison.
The other shapes
Not the one you meant?
- Try the math
Merchant cash advance
Factor rate times advance: the total you remit, and what the money costs.
- Try the math
Term loan
A fixed monthly payment, and the total interest over the term.
- Try the math
Equipment financing
The payment on the machine, and what financing adds to its price.
- Try the math
SBA loan
The payment on a long, government-backed term, and the interest over it.
- Try the math
Invoice factoring
Cash now on an unpaid invoice, the fee, and what comes back when it is paid.
Know what you can carry?
Then tell me what you need. About two minutes, no credit pull to start, and the decision stays yours.