The business line of credit is like a credit card. You can borrow up to the set expenditure limit and you will only have to pay interest on the amount you use. This is a flexible option that helps business owners cover daily costs and short-term cash flow gaps.
Like other business loans, there are costs to consider when acquiring a business line that includes interest and fees, and may vary from lender to lender. To better understand the credit costs of your business line, check out the general rates and rates.
Credit Cost Business Line: Interest Rates
Interest rates represent the amount that a lender charges you to use your business line. For credit lines on secured, unsecured business lines, the interest rates usually range from 8% to 60% or more.
Established businesses with excellent credit and proven track record of making profits tend to have low risk and get the highest fees. If you have poor credit, expect more payments. However, providing collateral can reduce costs. Lenders can charge interest in a variety of ways, including APR, simple interest rates, and coefficient fees. Let’s take a look at what each type of interest rate means what a loan means.
April
Annual Rate (APR) is the percentage of the total expenses paid to the annual business line, including interest and fees. The APR rate is higher than the interest rate alone. Because they show you the complete picture of what you owe.
Use a business loan calculator to understand how much you pay interest in your APR. This shows how much you pay each month and how much interest you will pay. You can insert this cost into your business budget and see if you can manage your credit repayment line.
For example, let’s see if a $100,000 loan costs two years at a 20% APR and it costs you.
| Loan amount | $100,000 |
| Loan period (month) | 24 months |
| interest rate | 20.0% |
| Total cost | $122,149.93 |
| Total interest paid | $22,149.93 |
Simple interest rates
A simple interest rate is expressed as a percentage of the loan amount, without taking up a percentage fee. These fees may be charged weekly or monthly depending on the terms of your loan agreement.
It is difficult to compare the cost of this loan side-by-side with other loans, as the fees do not include the fee. The easiest way to get a complete picture of your loan costs is to compare your total loan costs with the total loan costs of other business loans.
You can reduce the interest charged by paying more to the principal or paying off the loan earlier. Please note that some lenders charge early advance fees when paying your loan early.
Factor rate
Factor rates are another way of determining the business line of credit costs. Instead of percentages, factor rates use decimals. Most lenders charge a fixed factor rate between 1.1 and 1.5. Also, as well as interest rates, the lowest rates are usually reserved for established, successful businesses with excellent credit scores or excellent credit scores.
To determine the total amount owed on a loan using a coefficient rate, multiply the amount of the loan by the coefficient rate. For example, a $100,000 loan with a coefficient of 1.4 costs $140,000, but that doesn’t include the fee.
It is recommended to convert the factor rate to interest rates to help you compare the factor rates with other loans. Once you have converted the factor rate to an annual interest rate, use a business loan calculator to check the costs of a similar APR loan. You may be surprised that it could be cheaper than a loan with a coefficient.
Credit Cost Business Line: Repayment Terms
The time it takes to repay a loan can also play a role in the overall cost of your credit line. Most business lines offer 6-24 months of repayment terms on monthly or weekly repayments.
The longer you hold your debt, the more expensive it will cost you for profit. That’s because interest will continue to be added to your outstanding balance until your debt is fully paid back. Paying back your balance early will save you money.
The longer the repayment period, the more manageable weekly or monthly payments, but the catch is paying interest over the long term. A short repayment term increases each repayment amount, but saves interest.
Let’s say you take a loan for $25,000 with a 20% APR. The loan costs are as follows:
| semester | Monthly payment | Total interest will be 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 |
In short terms, you can save a lot of interest, but your monthly repayments will be higher. It’s best to choose the shortest possible time while maintaining repayment amounts that are easily managed within your budget.
Credit Cost Business Line: Fees
In addition to interest, the business line credit fees also increase the cost of the business line credit line. Some lenders may value several different rates. You need to compare fees between different credit lines to determine which overall cost to offer.
- Origination fee. Fees charged to open your business line.
- Annual fee. Fees charged annually remain open for business line credit lines.
- Maintenance fee: You will be charged monthly or annual fees to keep your business line open.
- We will discount the fee. The fees charged each time you draw on your credit line. This fee can lead to significant costs if you plan to use your credit line regularly.
- Prepaid penalty. If you try to pay off your loan early, you will be charged a fee. Not all lenders will be charged one, so if you plan to pay off your loan early, make sure your lender won’t rate this fee.
Conclusion
Obtaining a business line of credit is ideal for businesses that are looking to address short-term issues with cash flow and cover ongoing expenses such as payroll, inventory, consumables and more. However, if interest and fees are charged, the cost of borrowing can be much higher than expected.
If you are considering a business line, comparing the total costs of each option can save you money. You can also compare costs with other small business loans to see which options offer the best interest rates and terms.
