Interest on a revolving line of credit is calculated only on the amount you have actually drawn, not on your full credit limit, and it accrues day by day. The standard method multiplies your outstanding balance by your annual interest rate, divides by 365 to get a daily rate, and multiplies by the number of days that balance was outstanding: (Balance × Annual Rate ÷ 365) × Days. Because a revolving line lets you borrow, repay, and re-borrow, your balance changes throughout the month, so most lenders total each day's interest to reach your monthly charge. This guide walks through that math with rounded dollar examples, then covers the fees, rate types, and repayment rules that determine what you truly pay.
Key takeaways
- Interest accrues only on funds you have drawn, never on the unused portion of your credit limit.
- The core daily formula is (outstanding balance x annual interest rate / 365) x number of days at that balance.
- Because balances change as you draw and repay, most lenders sum daily interest across the billing cycle (the average-daily-balance method).
- The quoted interest rate is not your full cost; draw fees, maintenance fees, and origination fees push the effective APR higher.
- Many business lines carry variable rates tied to the Prime rate, so your interest cost can rise or fall mid-term.
- Paying down your balance early in the cycle directly lowers the interest you owe, since fewer days accrue at the higher balance.
- Revenue-based financing is a fixed-fee alternative that quotes a factor rate instead of accruing daily interest.
The core formula: interest on what you draw
A revolving line of credit works like a reusable pool of money. If you are approved for $50,000 but only draw $15,000, interest is charged on the $15,000, not the $50,000. That is the single most important difference from a term loan, where interest applies to the full disbursed amount from day one.
The daily interest calculation has three inputs:
- Outstanding balance — the dollars currently drawn and unpaid.
- Annual interest rate (APR or nominal rate) — expressed as a percentage per year.
- Days outstanding — how many days that balance sat before it changed.
The formula:
Daily interest = (Outstanding balance × Annual rate) ÷ 365
Multiply that daily figure by the number of days in the period to get the interest charge. Some lenders divide by 360 instead of 365 (a convention called the “banker’s year”), which slightly raises the daily rate; always confirm which divisor your agreement uses, because it changes the result.
A single-draw worked example
Suppose you draw $20,000 on a line with an 18% annual rate and carry that exact balance for a full 30-day month. For example:
- Daily interest = ($20,000 × 0.18) ÷ 365 = about $9.86 per day
- Monthly interest = $9.86 × 30 = about $296
The table below shows how the same $20,000 balance costs more or less depending only on the rate. Figures are rounded and shown for example.
| Annual rate | Daily interest | Interest for 30 days |
|---|---|---|
| 10% | ~$5.48 | ~$164 |
| 18% | ~$9.86 | ~$296 |
| 28% | ~$15.34 | ~$460 |
| 40% | ~$21.92 | ~$658 |
Notice that nothing here depends on your credit limit. Whether your limit is $25,000 or $250,000, a $20,000 balance at 18% costs roughly the same $296 for the month.
When your balance changes mid-cycle: the average daily balance method
Real revolving accounts rarely hold one steady balance. You might draw, make a payment, then draw again. Lenders handle this by calculating interest for each segment of days at each balance, then adding the segments together. This is the average daily balance method.
Imagine a 30-day cycle at an 18% annual rate (a daily rate of about 0.0493%) where your balance moves like this. Figures are rounded and shown for example.
| Days in cycle | Balance during those days | Interest accrued |
|---|---|---|
| Days 1–10 | $20,000 | ~$99 |
| Days 11–20 | $12,000 (after an $8,000 payment) | ~$59 |
| Days 21–30 | $17,000 (after a new $5,000 draw) | ~$84 |
| Total | — | ~$242 |
The lesson is practical: paying down early in the cycle removes high-balance days from the calculation, and every day you shave off a large balance saves real dollars. This is why sweeping idle cash against your line, even briefly, lowers your interest.
Fixed vs. variable rates and compounding
Many business lines of credit carry a variable rate expressed as an index plus a margin, such as “Prime + 6%.” When the Prime rate moves, your interest cost moves with it, so the same balance can cost more next quarter than it does today. A smaller number of products offer a fixed rate that stays constant for the draw’s term. Neither is automatically better; fixed gives you predictability, variable can be cheaper when benchmark rates fall.
Compounding matters too. If unpaid interest is added to your balance and then itself accrues interest, your cost grows faster than simple daily interest suggests. Ask two questions before you sign: how often is interest capitalized (added to principal), and is there a grace period during which a fully repaid balance accrues no interest? Lines that compound monthly on any carried balance cost more than the headline rate implies.
Beyond interest: the fees that set your real cost
The interest rate is only part of the price. Revolving facilities commonly layer on fees that the quoted rate hides, and these are what separate the nominal rate from the true APR (annual percentage rate), which is meant to fold fees into a single comparable number.
| Fee type | What it is | Typical trigger |
|---|---|---|
| Draw fee | A flat percent charged each time you pull funds | Every draw |
| Maintenance / monthly fee | A recurring charge to keep the line open | Monthly, even at $0 balance |
| Origination fee | Upfront cost to open the facility | At approval |
| Unused-line fee | A charge on the portion you did not draw | Periodically |
| Late / returned-payment fee | Penalty for missed or bounced payments | On default events |
To estimate your effective APR, add a year of fees to a year of interest, divide by the average balance you actually carry, and compare that figure across offers. A 12% line with a 2% draw fee every month can easily cost more than an 18% line with no draw fee, depending on how often you draw.
Minimum payments and how they affect interest
Revolving lines usually require a minimum monthly payment, often a small percentage of the balance plus accrued interest, or interest-only during a draw period. Paying only the minimum keeps your balance high, which keeps daily interest high, and can stretch repayment far longer than you expect. Because interest is recalculated on the balance every day, the fastest way to cut total interest is to pay more than the minimum and to pay early in the cycle rather than on the due date.
One more nuance: some lines separate a draw period (when you can borrow and may pay interest only) from a repayment period (when the balance amortizes and payments rise). Know which phase you are in, because interest-only minimums can mask how much principal still remains.
When revenue-based financing fits better than a revolving line
Revolving credit rewards businesses with steady cash flow and a strong credit profile, because approval and pricing lean heavily on credit score, time in business, and financial statements. If your revenue is strong but your credit score is not, a revolving line can be hard to qualify for or expensive once fees are stacked in.
A revenue-based financing or MCA marketplace is a common alternative. Instead of accruing daily interest, it quotes a factor rate: you agree to repay a fixed total (for example, $13,000 back on $10,000 advanced) with no compounding and no daily-balance math. Approval leans on your bank-deposit history and monthly revenue more than your FICO score, which is why many providers work with scores of 500 and up. Typical parameters include a minimum of around $10,000, and funding that often lands within 24 to 48 hours. Nothing is guaranteed, and because the cost is fixed rather than tied to how fast you repay, it is best suited to a specific short-term need rather than an open-ended revolving buffer. Comparing a factor rate to an interest rate requires converting both to an effective APR before you decide.
Frequently asked questions
Is interest charged on my whole credit limit or only what I borrow?
Only on what you draw. If your limit is $50,000 and you borrow $10,000, interest accrues on the $10,000. The unused $40,000 costs nothing in interest, though some lenders apply a separate unused-line fee.
What is the basic formula for revolving credit interest?
Daily interest equals your outstanding balance times your annual rate, divided by 365 (some lenders use 360). Multiply the daily figure by the number of days the balance was outstanding, and sum across the billing cycle if the balance changed.
Why does my interest charge differ from a simple rate-times-balance calculation?
Because revolving balances change as you draw and repay. Lenders use the average daily balance method, calculating interest for each stretch of days at each balance and adding them together, so mid-cycle payments and draws change the total.
Does paying early actually save me money?
Yes. Interest is recalculated on your balance every day, so reducing the balance early in the cycle removes high-balance days from the calculation. Paying early rather than on the due date directly lowers total interest.
What is the difference between the interest rate and the APR?
The interest rate covers only the interest itself. The APR folds in fees such as draw, origination, and maintenance charges to express your total annualized cost, making it the better number for comparing offers.
Are business line-of-credit rates fixed or variable?
Many are variable, quoted as an index plus a margin such as Prime plus a set percentage, so your cost moves when the benchmark moves. Some products offer fixed rates for predictability. Always confirm which type applies before signing.
How is revenue-based financing priced differently from a revolving line?
Revenue-based financing and MCAs use a fixed factor rate instead of daily-accruing interest. You repay a set total regardless of how quickly you pay, with no compounding. To compare it fairly to a line of credit, convert both costs to an effective APR.
What if my credit score is low but my revenue is strong?
A revolving line may be hard to qualify for, since it weighs credit heavily. Revenue-based financing leans on bank-deposit history and monthly revenue instead, often working with FICO scores of 500 and up, minimums around $10,000, and funding frequently within 24 to 48 hours, though approval is never guaranteed.
