On a business line of credit, the interest rate is the raw percentage charged on the balance you draw, while the APR (annual percentage rate) is that same rate plus the mandatory fees that come with the line — draw fees, origination or annual fees, maintenance charges — expressed as a single yearly number. Interest rate answers "what does the money cost while I'm using it?" APR answers "what does this whole facility cost me over a year?" For a term loan the two sit close together. For a revolving line — where you draw, repay, and redraw, and where flat per-draw fees land every time you tap it — APR can run meaningfully higher than the sticker rate. APR is the number that lets you line up one lender's offer against another on equal footing, but as you'll see, even APR breaks down when you're comparing against short-term, revenue-based products.
Key takeaways
- Interest rate applies only to your drawn balance, not your full credit limit — undrawn capacity accrues no interest.
- APR bundles the interest rate together with mandatory fees (origination, draw, annual, maintenance) into one annualized figure for apples-to-apples comparison.
- On a revolving line, flat per-draw fees inflate the effective APR the more often you tap the line — frequent small draws cost more per dollar than one large draw.
- Most business lines carry a variable rate tied to a benchmark (often prime) plus a margin, so your rate can move during the draw period.
- APR is designed for amortizing, longer-term debt; it distorts on short-duration products, which is why cash advances quote a factor rate instead.
- A low advertised interest rate paired with heavy fees can carry a higher APR than a higher-rate, low-fee line — always compare the APR, not the headline rate.
- Revenue-based financing is underwritten on bank deposits and revenue rather than rate shopping, so it's approved on cash-flow strength, not on beating an APR.
Interest rate: the cost of the balance you carry
The interest rate on a line of credit applies only to the outstanding balance — the money you've drawn and haven't yet repaid — not to the full approved limit. Approved for $75,000 but only drew $20,000? Interest accrues on the $20,000. That's the structural advantage of revolving credit over a lump-sum loan: idle capacity costs nothing in interest.
Most business lines carry a variable rate: a benchmark (commonly the prime rate) plus a margin the lender sets based on your credit profile, time in business, and revenue. When the benchmark moves, your rate moves with it, so the cost of carrying a balance during a long draw period isn't fixed. The interest rate is honest about one thing and one thing only — the price of the money while it sits in your account. It says nothing about what it cost you to open, keep, or draw on the line.
APR: the interest rate plus everything else
APR exists because the interest rate alone hides real costs. A lender can advertise a low rate and recover margin through fees — an origination fee to open the line, an annual or monthly maintenance fee to keep it, and a draw fee (often a flat percentage) each time you pull funds. APR rolls those mandatory charges into the rate and annualizes the total, so two offers with different fee structures become comparable in a single number.
The catch on a revolving line: APR assumes a borrowing pattern. Fee-heavy lines look cheaper (lower APR) if you draw a large amount once and hold it, and more expensive if you make many small draws, because each flat draw fee is spread over less principal and less time. So the same line can carry very different effective APRs for two businesses depending on how they use it. Read the APR the lender quotes, then ask which draw assumption it's built on.
Why the two numbers drift apart on a revolving line
On a term loan you borrow once, so fees get spread over the whole balance for the whole term and APR sits just above the interest rate. A line of credit breaks that tidiness in three ways:
- Per-draw fees repeat. A flat draw fee is charged each time you access funds. Ten small draws mean ten fees; one large draw means one. Same rate, very different APR.
- Short holding periods concentrate fixed costs. Borrow for three weeks and repay, and an upfront fee has almost no time to amortize — annualized, it looks enormous.
- Maintenance and annual fees hit whether you borrow or not. If you keep a line open but barely use it, those fixed fees have almost no interest to blend into, so the effective APR on the little you did borrow can spike.
None of this makes a line "bad." It means the sticker interest rate systematically understates cost on revolving credit, and APR only tells the truth if it matches how you'll actually use the line.
Worked example: same rate, different APR
The figures below are illustrative (for example only) to show mechanics, not quotes. Notice the interest rate is identical across all three; only the fee structure and usage pattern change — and that alone moves the APR.
| Scenario | Stated interest rate | Fees (for example) | How it's used | Effective APR (for example) |
|---|---|---|---|---|
| One large draw, held | 14% | 2% origination, no draw fee | $40k drawn once, held ~10 months | ~16% |
| Frequent small draws | 14% | 1.5% flat fee per draw | $40k across 8 short draws | ~24% |
| Line kept, lightly used | 14% | $150/mo maintenance | $8k drawn over the year | ~30% |
Deliberately, there's no total-dollar payback figure here — on a revolving line your balance changes constantly, so a single "you'll pay $X" number would be fiction. The takeaway is directional: the more your usage fragments into small, short draws against fixed fees, the wider APR opens up above the rate.
Where cash advances and revenue-based financing fit
Both interest rate and APR assume debt that amortizes over time. Short-duration, cash-flow products don't work that way, which is why a merchant cash advance and revenue-based financing quote a factor rate instead — a fixed multiple of the amount advanced, not a rate that accrues on a shrinking balance. There's no revolving draw fee stacking, and the cost is set at funding rather than moving with a benchmark.
Trying to convert a short cash advance into an APR produces a number that looks alarming precisely because APR annualizes fixed costs over a short window — the same math that made the "lightly used line" row above spike. That's a mismatch of tool to product, not a hidden gotcha. The right comparison for a cash advance is: what does the fixed cost buy me in speed and access, and can my revenue comfortably carry the daily or weekly remittance? Approval there rests on bank deposits and revenue, not on out-shopping an APR.
Decision framework: which number should drive your choice
Lead with APR when you're comparing two or more line-of-credit or term offers head-to-head, you'll hold balances for months, and you want a single figure that neutralizes different fee structures. APR is the correct referee for like-vs-like revolving/amortizing debt.
Lead with the interest rate (and the fee schedule line by line) when you'll draw large and hold, so per-draw fees barely apply and the rate dominates your real cost — the blended APR will land close to the rate anyway.
Look past both numbers to factor rate and cash-flow fit when you need funding in 24–48 hours, your credit is thin or rebuilding (FICO in the 500s), or your revenue is strong but your balance sheet won't clear a bank line. Here APR is the wrong lens; the question is whether the remittance fits your deposit rhythm. Revenue-based financing and cash advances are built for exactly this.
Avoid rate-shopping altogether when the real constraint is approval, not price. A slightly lower APR you can't qualify for or can't get funded in time isn't cheaper — it's unavailable. Match the product to your situation first, then optimize cost within that product.
Choose a line of credit if / choose revenue-based financing if
A fair head-to-head, because the right answer depends on your profile, not on which product is "better."
| Choose a business line of credit if… | Choose revenue-based financing / MCA if… |
|---|---|
| You have strong credit (typically 660+) and can wait through a fuller underwriting process | Your FICO is 500+ and approval hinges on bank deposits and revenue, not credit score |
| You want reusable, revolving access and expect to draw large and hold | You need a lump sum fast — often in 24–48 hours — for a specific, time-sensitive need |
| You can compare offers on APR and want the lowest all-in annualized cost | You want a fixed, known cost set at funding and remittance tied to your sales rhythm |
| Your business has time in operation and financials a bank-style lender will accept | You're newer, seasonal, or have been declined by a bank but have consistent deposits |
| Minimums and documentation aren't an obstacle | You need $10,000 or more and want a streamlined, revenue-first application |
Our recommended path for the second column is a revenue-based / MCA marketplace: underwriting weighs your bank deposits and revenue over your credit score, minimums start around $10,000, FICO 500+ is workable, and funding typically lands in 24–48 hours. It's the right fit when access and speed matter more than shaving an APR — though no legitimate funder can ever guarantee approval. See our merchant cash advance overview for how factor-rate pricing and remittance work in practice.
Frequently asked questions
Is APR always higher than the interest rate on a business line of credit?
Usually, yes, because APR adds mandatory fees to the interest rate. The only time they'd be equal is a line with zero fees. On revolving lines with per-draw or maintenance fees, APR is typically higher — and the gap widens the more often you make small, short draws.
Which number should I use to compare two line-of-credit offers?
Use APR for a like-for-like comparison, since it neutralizes different fee structures into one annualized figure. But confirm which draw assumption each lender's APR is built on, and check the fee schedule directly — a low advertised rate with heavy fees can carry a higher APR than a higher-rate, low-fee line.
Why does my line's rate change over time?
Most business lines carry a variable rate: a benchmark (often the prime rate) plus a fixed margin set from your profile. When the benchmark moves, your rate moves with it, so the cost of carrying a balance during a long draw period isn't locked in.
Does interest accrue on my full credit limit or just what I draw?
Only on what you draw and haven't repaid. If you're approved for $75,000 and draw $20,000, interest accrues on the $20,000. Undrawn capacity costs nothing in interest — though some lines carry a separate maintenance or annual fee regardless of use.
Why do cash advances quote a factor rate instead of an APR?
Because APR is built for debt that amortizes over time, and a cash advance is a fixed multiple of the amount advanced, repaid through revenue over a short window. A factor rate states the cost cleanly at funding. Forcing a short advance into an APR produces a distorted number because APR annualizes fixed costs over a brief period.
I have a 540 FICO. Should I be comparing APRs at all?
Probably not as your first move. At that score, most bank-style lines will be out of reach, so the binding constraint is approval, not price. Revenue-based financing underwrites on your bank deposits and revenue with FICO 500+ workable, so the better question is whether the remittance fits your cash flow — not which APR is lowest.
Can a lower interest rate actually cost me more?
Yes. A line advertising a low rate but charging a flat fee on every draw, plus a monthly maintenance fee, can carry a higher effective APR than a higher-rate line with no fees — especially if you make frequent small draws. That's exactly why APR exists: to expose fee-driven cost the sticker rate hides.
How fast can revenue-based financing fund compared with a line of credit?
Revenue-based financing and MCA marketplaces typically fund in 24–48 hours because underwriting centers on bank deposits and revenue rather than a longer credit review. A traditional line of credit generally takes longer to underwrite. No funder can guarantee approval, but speed is a core reason businesses choose the revenue-based route when timing matters.
