How the rate is set
Funders start from a base rate and add a margin based on risk. Stronger credit, revenue and history earn lower margins.
Some lines use a variable rate tied to a benchmark such as the prime rate, so your rate can change when the benchmark moves. Others use a fixed rate or a simple fee per draw. Banks usually price lower than online funders, but they are also stricter about who qualifies.
Read how the Federal Reserve affects your business loan to understand variable rates. Check current market rates with the funder, since they change.
How interest accrues on draws
Interest builds on your outstanding balance, usually daily or monthly. Pay down the balance and your interest falls with it.
In an illustrative example, you draw $10,000 on a line with a 12 percent annual rate. Interest is about $100 per month on that balance. Repay $5,000 after a month and the next month costs roughly $50. Unused credit costs nothing in interest, though fees may still apply.
Our guide to calculating interest on revolving credit has the formula.
Rate versus APR versus fee-based pricing
A quoted rate may leave out fees. APR includes certain fees, and some funders charge a flat percentage per draw instead of annual interest.
Ask what the rate does not include. A line with a lower rate but an origination fee and monthly maintenance charge can cost more than a line with a higher rate and no fees. When a funder prices by draw, convert the fee into a yearly figure based on how fast you repay.
See what APR is and line of credit fees.
What moves your rate up or down
Credit score, revenue, time in business, industry risk, collateral and repayment history all move pricing.
- Higher revenue and steadier deposits usually lower the rate.
- Collateral can reduce the rate on a secured line. See secured vs. unsecured lines.
- Late payments can raise it.
- A longer history with the funder can lead to better terms at renewal.
Comparing two lines side by side
Estimate how much you will draw, for how long, then add interest and all fees for each line. The lower total wins, not the lower rate.
| Item | Line A | Line B |
|---|---|---|
| Interest rate | 10% | 14% |
| Interest cost | $2,000 | $2,800 |
| Fees for the year | $1,600 | $0 |
| Total cost | $3,600 | $2,800 |
Line B has the higher rate and the lower cost. These numbers are examples only. Use the line of credit calculator with your own figures.
Common mistakes when reading rates
Owners often compare a quoted rate on one line with an APR on another, ignore fees, or assume a low teaser rate lasts forever.
Check whether the rate is promotional and for how long. Confirm how often interest compounds or is charged, and whether the rate changes if you miss a payment. Ask for the cost of a typical $10,000 draw repaid over three months in dollars. Dollars are harder to hide behind than percentages, and they let you compare a bank line with an online line fairly.
Getting the best rate you can
Improve your credit and cash-flow picture before applying, apply with complete documents and compare more than one option.
Pay down balances, keep clean bank statements and bring three months of statements. ROI Funder matches a file to the funders in our network that fit it and shows true cost and payback before you sign. Applying takes a few minutes and uses a soft credit pull. See the business line of credit page or apply now.
Frequently asked questions
Do I pay interest on the whole credit limit?
No. Interest is normally charged only on the amount you have drawn and not yet repaid.
Are line of credit rates fixed or variable?
Both exist. Variable rates move with a benchmark, while fixed rates stay the same. Ask which one you are being offered.
Is a lower rate always cheaper?
No. Fees, draw charges and payment schedules can make a lower-rate line cost more overall.
What affects my rate the most?
Credit, revenue, time in business and collateral are the main factors.