Key takeaways
- Average business line of credit interest rates range from 8 percent to 60 percent
- Longer repayment terms can increase overall costs
- Business lines of credit can come with fees, such as origination fees, draw fees for withdrawing funds or monthly service fees
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 or short-term cash flow gaps.
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. To better understand a business line of credit costs, here’s a look at the common rates and fees.
Business line of credit cost: Interest rates
Interest rates represent the amount a lender will charge you for using your business line of credit. For secured and unsecured types of business lines of credit, interest 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. 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.
Bankrate insight
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. 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 how much you’ll pay in interest with an APR, use a business loan calculator, which can show you how much you’ll pay each month and how much interest it will cost you. You can insert this cost into your business budget to see if you can manage the line of credit repayments.
For example, here’s a look at how much a $100,000 loan with a 20 percent APR will cost if it takes you two years to pay off.
| Loan amount | $100,000 |
| Loan term (months) | 24 months |
| Interest rate | 20.0% |
| Total cost | $122,149.93 |
| Total interest paid | $22,149.93 |
Bankrate insight
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. The easiest way to get a full picture of loan costs is to compare the total loan costs with the total loan costs of other business loans.
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. 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.
To help you compare factor rates with other loans, you’ll want to convert the factor rate to an interest rate. 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 a loan with a factor rate.
Bankrate insight
If you get a line of credit with a factor rate, you likely won’t save money on early repayment. The factor rate gets charged upfront, requiring you to pay the entire fee regardless of when you pay off the loan — unless your lender offers a prepayment discount.
Business line of credit cost: Repayment terms
The amount of time it takes you to pay off a loan can also play a role in the overall cost of the line of credit. 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.
A longer repayment period can make the weekly or monthly payments more manageable, but the catch is that you’ll pay more in interest long-term. Short repayment terms raise the amount of each repayment, but you’ll save in interest.
Let’s say you take out a loan for $25,000 with a 20 percent APR. The loan costs would be:
| Term | Monthly payment | Total interest charged |
| 6 months | $4,413.07 | $1,278.42 |
| 12 months | $2,315.86 | $2,790.35 |
| 24 months | $1,272.40 | $5,537.48 |
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.
Bottom line
Getting 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. You can also compare costs with other small business loans to see which options offer the best interest rates and terms.
Frequently asked questions
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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.
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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.
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If a startup business has been operating for at least six months, a business line of credit is an option with certain lenders, especially online lenders. Many banks require more time in business, such as two years, to qualify.
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