How to Calculate Interest on Revolving Credit

The basic interest formula

Interest equals the balance times the annual rate times the time outstanding. For one month, divide the annual rate by 12.

Start with three inputs: the balance you owe, the annual interest rate, and how long the balance stays outstanding.

Interest = balance x annual rate x (days outstanding / 365)

Some lenders use a 360-day year, which makes the charge slightly higher. Your agreement states which convention applies, so read it before you compare lines.

A worked example with a changing balance

Because you draw and repay, the balance changes during the month. Interest follows each day's balance, so a mid-month repayment lowers the charge.

This is an illustrative example. Assume a 12% annual rate, and a 30-day month.

• Days 1-10: you owe $10,000
• Days 11-20: you draw $5,000 more and owe $15,000
• Days 21-30: you repay $8,000 and owe $7,000

Add up balance-days: (10,000 x 10) + (15,000 x 10) + (7,000 x 10) = 320,000. Divide by 30 for an average balance of about $10,667. Interest is roughly $10,667 x 12% x 30/365, or about $105 for the month.

Repaying early on day 21 saved money. Had you stayed at $15,000 all month, the same math gives about $148.

Average daily balance versus end-of-month balance

Most revolving lines use the average daily balance. A few charge on the balance outstanding on a billing date, which is simpler but can penalize or reward timing.

Ask which method your line uses. Under average daily balance, every day counts. Under an end-of-period method, a large draw repaid before the cutoff may cost nothing, while a small draw left past the cutoff is charged in full.

For a deeper look at how charges build up, see how interest works on a business line of credit.

Fees that sit on top of interest

Interest is only part of the cost. Draw fees, maintenance fees and renewal fees can raise your true cost, especially on small balances.

Add these to your estimate:

• Origination or setup fees
• Draw or withdrawal fees
• Monthly or annual maintenance fees
• Renewal fees

Our guide to business line of credit fees lists what to look for. Then convert everything to one yearly cost so offers can be compared fairly. The APR explainer shows how.

Simple ways to lower what you pay

Draw only what you need, repay as soon as cash arrives, and avoid carrying a balance on slow-return spending.

Because interest is daily, speed matters. Pay down the line the day a customer payment lands. Match each draw to a specific use with a clear payback, such as inventory that turns in 30 days. Avoid using the line to cover long-term losses, since the balance never clears.

A quick monthly check you can run yourself

Take your statement's average daily balance, multiply by the annual rate, and divide by 12 for a fast monthly estimate.

You do not need special software. Pull the daily balances from your online portal, add them up, and divide by the number of days in the month. Multiply that average by the annual rate, then by days over 365. Compare your result with the interest line on the statement. A gap of a few dollars usually comes from rounding or the day-count convention. A larger gap is worth a question to your funder.

Keep a small log each month. Over a year it shows whether your borrowing is shrinking or quietly growing.

When a revolving line fits your business

A revolving line suits recurring, short-term cash gaps. If you need a one-time purchase, a term loan may cost less.

A business line of credit lets you draw, repay and redraw. ROI Funder considers businesses with 6+ months in business, $20,000+ monthly revenue and 500+ FICO. Applying takes a few minutes with a soft credit pull, and you are not obligated to accept an offer.