Line of Credit Cost Calculator

Fees on the facility, interest on the balance.

Written and maintained by Mohit PatelLast checked August 4, 2026How we build these

Currency

Facility size

Average amount drawn

Interest on drawn balance

Commitment fee on undrawn

Annual arrangement fee

Annual cost

$6,700

16% on the amount actually used

Interest on drawn balance$4,620

Commitment fee on undrawn$580

Arrangement fee$1,500

Effective rate on drawn funds16%

The headline rate is 11% and the effective rate on money you actually used is 16%, because commitment and arrangement fees are paid on the facility rather than the balance. A facility sized well above your real need is expensive insurance.

How the Line of Credit Cost Calculator works

Commitment and arrangement fees are paid on the facility rather than the balance, so a line sized well above your real need is expensive insurance. The effective rate on money you actually used is always above the headline.

Also known as: revolving credit cost · credit facility interest · business overdraft cost

Paying for access and for use

A line of credit has two costs and comparing facilities means looking at both. Interest on the drawn balance, charged only when you use it, and fees on the facility itself whether or not you do.

The fees vary in name and effect: arrangement or setup fees on opening, annual renewal fees, and non-utilisation fees charged on the undrawn portion. A facility with a low interest rate and a 1% non-utilisation fee is not cheap for a business that rarely draws.

Which means the right comparison depends on your usage pattern. A business drawing continuously should optimise for the interest rate. One drawing occasionally for short periods should optimise for the fixed costs, because those dominate.

Where it beats a term loan

A term loan gives you a lump sum and charges interest on all of it from day one. A line of credit charges only on what you draw, which for irregular needs is dramatically cheaper.

The classic case is seasonal stock building. A business needing £60,000 for three months before Christmas pays interest on £60,000 for three months on a line of credit. On a twelve-month term loan for the same amount it pays interest on a declining balance for a year, which is roughly three times the interest for the same use.

The flexibility is worth paying something for. A facility that costs £600 a year in fees and saves £2,000 in interest against the term loan alternative is straightforwardly worthwhile, and the calculation is worth doing rather than defaulting to whichever product was offered.

The terms that matter more than the rate

Repayable on demand is the clause to look for. Many small business overdrafts and lines are technically repayable at the lender's discretion, which means the facility you are relying on can be withdrawn at the worst moment. Committed facilities cost more and cannot.

Covenants attach to larger facilities and are worth reading rather than skimming. Minimum turnover, maximum leverage, and information covenants requiring accounts within a period. Breaching an information covenant by filing late is technically a default and is far more common than a financial breach.

Review dates matter too. An annual review is an opportunity for the lender to reprice, reduce or withdraw, and it usually happens on their schedule rather than yours. Knowing when it falls, and going into it with current management accounts, materially improves the outcome.

Sizing the facility

Too small and it does not cover the peak need, which defeats the purpose. Too large and you pay non-utilisation fees on capacity you never use.

The right size comes from the cash flow forecast: the maximum shortfall over the forecast period, plus a buffer. For seasonal businesses that is the peak of the stock build; for others it is usually the largest single payment cluster in the year.

Sellers routinely size facilities by asking for what they think they will get rather than what they need, which produces a facility that is either useless or expensive. Going in with a monthly cash forecast showing exactly where the shortfall falls and how large it is produces both a better-sized facility and a better rate, because it demonstrates the borrowing is planned rather than reactive.

Using it without becoming dependent

A line of credit should return to zero periodically. A facility permanently drawn to its limit is not a line of credit; it is a term loan at overdraft rates, which is the most expensive way to hold long-term debt.

The discipline that works is a target: fully repaid at least once a quarter, or once a year in a seasonal business after the peak has converted to cash. A facility that has not been at zero for two years is funding a structural shortfall rather than a timing one, and structural shortfalls need a different instrument.

It also matters for renewal. Lenders look at utilisation patterns, and a facility that cycles is evidence of a business managing its cash. One that sits permanently at the limit is evidence of a business that needs more than it has, which is not the impression you want at a review meeting.

Where to go next

The Line of Credit Cost question rarely arrives on its own. These are the ones that usually come with it:

Business Loan Repayment Calculator — Amortising loans cost less than they look.
Working Capital Calculator — The quick ratio is the honest one.
Inventory Financing Calculator — What share of gross profit the money costs.
Etsy Fee Calculator — Every Etsy fee on one sale, itemised.

Not financial advice. Marketplace fees change, and they vary by country, plan and seller status. Every rate here is an editable default, not a quoted price, check the platform's current fee schedule before you price a product against it. This is not tax or business advice.

Frequently asked questions

How does a line of credit cost work?

Interest on the drawn balance, a commitment fee on the undrawn portion, and usually an annual arrangement fee. Only the first depends on how much you borrow.

How big should the facility be?

Large enough for the peak need and no larger. Every unused pound carries a commitment fee, so over-sizing costs money every month for insurance you never claim.

Is a line better than a term loan?

For fluctuating working capital, yes. You only pay interest on what you use. For a fixed investment, a term loan is usually cheaper and more predictable.

What is the effective rate?

Total annual cost divided by the average drawn balance. It is always above the headline interest rate, and the gap widens the less of the facility you use.