How a business line of credit works
A line of credit sets a limit you can draw against. You take what you need, repay it, and draw again as the agreement allows. Many lines charge interest on the balance you carry, and some add draw fees, maintenance fees or both. Roifunder helps businesses compare lines of credit through our funding partners alongside lump-sum options.
- Limit: the most you can have outstanding at once
- Draws: amounts you take as needed, often deposited to your business account
- Interest: usually charged on the balance outstanding, not the full limit
- Fees: draw, maintenance or renewal fees vary by funder; read your agreement to see which apply
- Repayment: weekly or monthly schedules are both common
The cost formula for a draw
The interest on a draw is roughly the balance times the periodic rate times the number of periods you carry it, plus any draw fee. Because the balance usually shrinks as you repay, a declining balance costs less than the full amount carried for the full period. Add every fee, then divide total cost by the amount drawn for cost per dollar.
Approximate cost = average balance × monthly rate × months carried + fees
Cost per dollar = total cost ÷ amount drawn
Example: you draw $20,000, a $300 draw fee applies, and the monthly rate is 1.5 percent. Carry the full balance for one month and repay it: interest is about $20,000 × 1.5% = $300, plus the $300 fee, for $600 in total, or 3 cents per dollar. Carry the same $20,000 for twelve months: about $3,600 in interest plus the fee, $3,900, or 19.5 cents per dollar. The rate and fee are illustrative only, not a quote or typical pricing.
| Example use | Interest | Draw fee | Total cost | Cost per dollar |
|---|---|---|---|---|
| $20,000 carried 1 month | $300 | $300 | $600 | 3 cents |
| $20,000 carried 3 months | $900 | $300 | $1,200 | 6 cents |
| $20,000 carried 12 months | $3,600 | $300 | $3,900 | 19.5 cents |
Short draws versus a carried balance
The same line can be inexpensive or costly depending on how you use it. A draw repaid within a month or two mostly costs the fee plus a little interest. A balance carried all year keeps accruing interest every month, so the cost per dollar keeps climbing. The table below shows one illustrative line used three different ways.
Draw fees matter most on small draws. Example: the same $300 fee on a $2,000 draw is 15 cents per dollar before any interest, so pulling many small amounts can cost more than one planned draw. If your line charges per draw, batch your needs.
When a line of credit pays back
A line pays back when each draw funds something that turns into cash within weeks: stock that sells quickly, materials for a job that pays on completion, or payroll ahead of an invoice you expect soon. The faster the draw comes back as revenue, the less interest you pay and the more of the gross profit you keep.
Example: a distributor draws $15,000 for a product run that sells within about 45 days at a gross profit of $4,500. At the illustrative pricing above, carrying the draw about a month and a half costs roughly $340 in interest plus the $300 fee, about $640 in total, leaving roughly $3,860 of the gross profit. If the product sits for six months, interest grows to about $1,350 and most of the advantage disappears. More on this in inventory funding payback math.
When to move a carried balance to a term loan
If the balance never really comes down, you are using a revolving line as long-term money. A term loan with a fixed schedule makes the cost predictable and may cost less over a year, depending on the offer. Compare a year of interest and fees on the carried balance with the total cost of a term loan for the same amount.
- Line, one year: balance × monthly rate × 12 + fees
- Term loan: total repaid − cash received
Put both into the two-offer comparison worksheet. A balance that never falls can also signal a cash-flow gap worth diagnosing; this affordability check helps. See term loans for the payment math.
What you’ll typically need
- Recent business bank statements
- Basic business and owner information
- Recent financial statements, if you have them
- A short description of how you plan to use the line
Frequently asked questions
How is interest on a line of credit calculated?
Many lines charge interest on the balance outstanding, calculated daily or monthly depending on the agreement. A rough estimate is your average balance times the periodic rate times the number of periods. Your agreement states the actual method, and it is worth asking the funder to show one sample month so you can check your own estimates.
How do draw fees change the cost of a small draw?
A flat draw fee weighs more on a small draw. In an illustrative case, a $300 fee is 1.5 cents per dollar on a $20,000 draw but 15 cents per dollar on a $2,000 draw, before interest. If your line charges per draw, plan fewer, larger draws sized to real needs instead of pulling small amounts often.
Is a line of credit cheaper than a term loan?
It can be for short draws you repay quickly, because you pay interest only while money is out. For a balance carried a year or longer, a term loan may cost the same or less, depending on the offers. Price your expected usage pattern on the line and compare it with a term loan's total repaid minus cash received.
What does it cost to keep an unused line open?
It depends on the agreement. Some lines charge nothing when the balance is zero, while others have maintenance, inactivity or renewal fees. Ask the funder for every fee that can apply when you are not drawing, and add a year of those fees to your cost estimate before deciding whether the line is worth keeping.
Price your draw pattern, then apply
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Updated September 14, 2026 · Roifunder Funding Team