How Much Will a Business Line of Credit Cost?

A business line of credit is like a credit card: You can borrow up to a set spending limit and only have to pay interest on the amount you use. This is a flexible option that can help business owners cover day-to-day costs, short-term cash flow gaps or small expenses.

Like any business loan, there are costs to consider when taking out a business line of credit, including interest rates and fees, which can vary from lender to lender. You’ll want to understand the various costs associated with your line of credit before withdrawing funds so that you can better prepare to manage repayments.  

Business line of credit cost: Interest rates

Interest rates represent the amount a lender will charge you for using your business line of credit. Interest rates for lines of credit average 7.25 percent to 8.17 percent, according to the Kansas City Federal Reserve. However, rates can run as high as 60 percent with some lenders. 

The exact interest rate will significantly impact how much you’ll pay for the loan overall. Even small changes in the interest rate can lead to much lower or higher costs. For that reason, you’ll want to compare lenders and prequalify for multiple lines of credit to see which one offers you the best rate.

Lenders can charge interest in different ways, including as an APR, simple interest rate or factor rate. Let’s look at what each type of interest rate means for your loan.

APR

The annual percentage rate (APR) is a percentage that shows the total cost you’ll pay for the business line of credit each year, including interest and fees. Because it incorporates fees, APR rates are higher than interest rates alone since they show you a complete picture of what you’ll owe.

To get an idea of business line of credit costs  with an APR, use a business loan calculator to show your monthly payment and how much you’ll pay in interest. 

For example, here’s a look at how much a $100,000 loan will cost with different APRs.

Simple interest rates

Simple interest rates are expressed as a percentage of the loan amount without accounting for fees in the percentage. These rates may be charged weekly or monthly, depending on the terms in your loan agreement. 

Because the rate doesn’t include fees, it’s difficult to compare the cost of this loan side by side with other loans. To get a full picture of loan costs, compare the total costs of the loans including all fees.

You can reduce the interest you get charged by paying more toward your principal or by paying off the loan early. Be aware that some lenders will charge an early prepayment fee when paying the loan off early.

Factor rates

Factor rates are another way to determine the business line of credit cost. Instead of a percentage, factor rates use a decimal like 1.10 or 1.50. Business lines of credit usually charge factor rates if they’re catering to business owners with bad credit. 

To determine the total cost of  a loan using factor rates, multiply the loan amount by the factor rate. For example, a $100,000 loan with a factor rate of 1.4 will cost you $140,000, but that doesn’t include any fees.

To help you compare factor rates with other loans, you’ll want to convert the factor rate to an interest rate. Then, use a calculator to see how much a loan with that APR would cost you. Be aware that factor rate loans typically have higher borrowing costs than loans charging an APR. 

Business line of credit cost: Repayment terms

The amount of time it takes you to pay off a loan  also plays a role in the  business line of credit cost . Most business lines of credit offer repayment terms of six to 24 months with monthly or weekly repayments.

Business lines of credit cost you more in interest the longer you hold on to debt. That’s because interest continues to get added to unpaid balances until your debt is completely paid off. Pay your balance off early, and you can save money.

Let’s say you take out a loan for $25,000 with a 20 percent APR. The loan costs would be:

The shorter terms save you significantly in interest but come with higher monthly repayments. It’s best to choose the shortest term possible while maintaining repayment amounts that you can easily manage in your budget.

Business line of credit cost: Fees

In addition to interest, business line of credit fees also drive up the cost of a business line of credit. Depending on the lender, a few different fees may be assessed. You’ll want to compare fees between different lines of credit to determine which one will offer the lowest overall cost.

• Origination fee. Fee charged for opening your business line of credit.
• Annual fee. Fee charged each year your business line of credit remains open.
• Maintenance fee: Monthly or annual fee charged to keep your business line of credit open.
• Draw fee. Fee charged each time you draw on your credit line. This fee can lead to significant costs if you plan to use your line of credit regularly.
• Prepayment penalty. A fee charged if you try to pay off a loan early. Not all lenders charge one, so if you plan to pay a loan off early, make sure your lender doesn’t assess this fee.

Business line of credit cost: secured vs. unsecured

Getting a secured or unsecured business line of credit can indirectly affect borrowing costs. That’s because lenders often charge a lower interest rate for a secured line of credit since it’s backed by collateral. The lender can seize the collateral to repay the loan if you fail to make payments, reducing risk for the lender.

On the other hand, an unsecured line of credit involves more risk because the lender can’t seize business assets. To offset the risk, the lender will usually charge a higher interest rate, increasing the cost of borrowing. If you don’t mind putting up business assets to secure the loan, you could save money in interest by doing so.

How to choose the right line of credit for your business

You’ll want to consider several factors when deciding which business line of credit is right for you.

• Eligibility. Every lender has its own requirements that you must meet in order to get approved. The requirements usually include a minimum time in business, credit score and monthly or annual revenue. Typically, online line of credit lenders have more lenient eligibility requirements than major banks.
• Interest rates. Prequalify with multiple lenders to see the interest rate offered to you. You may decide to choose a reputable lender with the best rates and terms, since it will mean lower borrowing costs overall.
• Terms and repayment schedule. Consider whether your business can handle a daily, weekly or monthly repayment schedule. Also, consider whether you need a long term to lower each payment or a short term to pay off the loan as quickly as possible.
• Customer support. If you value in-person support, you may want to go with a major bank lender like Bank of America or Wells Fargo. If you’re okay with phone or email support, your options for lenders expands to online lenders like Bluevine.

Managing your business line of credit

Managing your business line of credit effectively starts with knowing how much funding you can afford to withdraw from the credit line. Use a business loan calculator to estimate the payments to see if they easily fit in your budget. Only withdraw the funds you need for a specific purchase to avoid paying interest on a large loan amount. 

In addition, be careful when making multiple withdrawals from the line of credit. You don’t want to withdraw more than your business can handle because this can lead to a cycle of debt or worse, business loan default. 

As a rule of thumb, try to keep your debt-to-income ratio at 36 percent or lower, and your debt service coverage ratio at 1.25 or higher. These metrics help to ensure that you have plenty of revenue to cover all your debt repayments.

Finally, set up automatic payments to ensure that you meet all line of credit payments on time. Over time, as you make on-time payments, you will see your business credit score get stronger and help you qualify for better rates and terms in the future.

Bottom line

Getting a business line of credit is ideal for businesses looking to address short-term issues with cash flow or cover a small purchase. . But when interest and fees are tacked on, the cost of borrowing may be much higher than expected.

If you are considering a business line of credit, comparing the total cost of each option can help you save money. You can also compare costs with other small business loans to see which options offer the best interest rates and terms.

Frequently asked questions

• What are the rates for a business line of credit?
  

  Rates for a business line of credit range from 7 percent to 60 percent, depending on the lender, the type of loan and your financial history. For the best rates, you typically need to be an established business with strong financial records and great credit.

   

• Is there an annual fee for a business line of credit?
  

  Yes, some lenders charge an annual fee for a business line of credit. Typically, this fee is less than $200, and some lenders like Wells Fargo may even waive that fee for the first year.

• Can a startup business get a line of credit?
  

  If a startup business has been operating for at least six months, you may be able to find a business line of credit through an online lender like Fundbox. Many banks require more time in business, such as two years, to qualify.