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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.
Like any business loan, there are costs to taking out a business line of credit, including interest rates and fees, which can vary from lender to lender. To better understand how much a business line of credit will cost, here’s a look at the common rates and fees.
Business line of credit cost: Interest rates
Interest rates are expressed as a percentage and represent the amount a lender will charge you for your business line of credit, not including fees. For secured and unsecured types of business lines of credit, rates typically range from 8 percent to 60 percent APR or higher.
Established businesses with great credit and a track record of turning a profit are considered less risky and tend to get the best rates. If you have bad credit, expect to pay more, though you may be able to lessen the costs by providing collateral.
To get an idea of how much you’ll pay in interest, use a business loan calculator, which can show you how much you’ll pay each month and how much interest it will cost you. For example, here’s a look at how much a $100,000 loan with a 20 percent interest rate will cost if it takes you two years to pay off.
|Loan term (months)||24 months|
|Total interest paid||$58,963.30|
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. APR rates are higher than interest rates alone since they show you a complete picture of what you’ll owe.
Factor rates are another way to determine the cost of a business line of credit. Instead of a percentage, factor rates use a decimal. Most lenders charge fixed factor rates between 1.1 and 1.5. And like interest rates, the lowest rates are typically reserved for established and successful businesses with good or excellent credit scores.
To determine the total amount you owe on 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.
How to convert factor rates to APR
When looking for a business line of credit, it helps to be able to have an accurate picture of the total costs. That’s why converting a factor rate to an interest rate is a good idea. Here’s how you do it using a $100,000 loan with a factor rate of 1.4 and a two-year repayment period:
Step 1: Find the overall loan amount.
First, multiply the loan amount by the factor rate to get the overall loan amount.
Original loan amount x factor rate = Overall loan amount
Example: $100,000 x 1.4 = $140,000
Step 2: Find the total interest costs
The total interest cost will be the difference between the original funding amount and the overall loan amount.
Overall loan amount – original funding amount = Total interest costs
Example: $140,000 – $100,000 = $40,000
Step 3: Convert cost to a percentage
Next, divide the interest cost by the original funding amount to see the percentage cost.
Interest cost / original funding amount = Percentage cost
Example: $40,000 / $100,000 = 0.4
Step 4: Find the annual interest rate.
Next, multiply the percentage cost by 365 to see what the interest rate is over the period of a year.
Percentage cost x 365 days in a year = X
Example: 0.4 x 365 = 146
Then divide your answer by the repayment period.
X / Repayment period (in days) = Estimated annual interest rate
Example: 146 / 730 = 0.2 or 20%
Keep in mind this isn’t a true APR since it doesn’t factor in fees. But converting a factor rate to an annual interest rate can make it easier to compare the costs of using a business line of credit with different lenders.
|Steps to convert factor rate to APR||Example|
|Step 1: Find the overall loan amount||$100,000 x 1.4 = $140,00|
|Step 2: Find the total interest costs||$140,000 – $100,000 = $40,000|
|Step 3: Convert cost to a percentage||$40,000 / $100,000 = 0.4|
|Step 4: Find the annual interest rate||0.4 x 365 = 146|
|Step 4 (continued)||146 / 730 = 0.20 or 20%|
|Estimated annual interest rate||20%|
Once you’ve converted your factor rate to an annual interest rate, use a business loan calculator to see how much a loan with a similar APR would cost. You may be surprised to see that it could be cheaper than the loan with a factor rate. For more information, check out our guide on converting factor rates to annual interest rates.
Business line of credit cost: Repayment terms
The amount of time it takes you to pay off a loan can also play a role. Business lines of credit with interest rates cost more the longer you hold on to debt. That’s because interest continues to get added on to unpaid balances until your debt is completely paid off. Pay your balance off early, and you can save money.
Factor rates are typically fixed costs, meaning the amount you owe won’t change no matter how quickly you pay it off. For example, the above $100,000 loan with a factor rate of 1.4 will cost $40,000 whether you pay it off in two years or one.
A longer repayment period can make the weekly or monthly payments more manageable. Sometimes, a lender may offer prepayment discounts, which could help you save money. But shorter repayment periods may not be in your best interest if they don’t.
Business line of credit cost: Fees
In addition to interest, business loan fees also drive up the cost of a business line of credit. Depending on the lender, a few different fees may be assessed. Here’s a look at some of the common fees you may find:
- 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.
- 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.
A business line of credit is ideal for businesses looking to address short-term issues with cash flow and cover ongoing expenses like payroll, inventory and supplies. 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.
Frequently asked questions
Rates for a business line of credit range from 8 percent to 60 percent and up, 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.
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.
If a startup business has been operating for at least six months, a business line of credit is an option with certain lenders, including FundBox.