A Business Owner's Guide to Revolving Lines of Credit
A revolving line of credit is a flexible method of business financing. Rather than borrowing a fixed amount of money once with a term loan, a revolving line of credit gives your business the ability to borrow however much you need (up to a certain pre-approved limit), as many times as you need to, without having to reapply.
A business line of credit is perfect for any business owner who wants to make sure they have the resources they need at all times. It can be used to fund any legitimate business expenses — including inventory, new equipment and payroll — and you only need to make payments if and when you borrow money.
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How Is Revolving Interest Calculated?
To use a revolving line of credit loan as intended, you should be clear on how revolving credit works — and especially on how revolving interest is determined. With a revolving line of credit, interest is calculated based on your principal balance amount. You only pay interest on funds drawn.
See example with the infographic below to learn how interest is calculated:
1. Determining Principal Balance
Interest on a revolving loan is calculated based on the amount of the principal balance that is outstanding for the prior month. You'll never pay interest on interest; you'll only pay interest on the money you've used. Here's an example that assumes a monthly repayment schedule:
- June 1 – 5: When your balance is $0, you pay no interest for those five days.
- June 6: You borrow $10,000.
- June 10: You voluntarily pay back $5,000 towards your principle.
- July 1: Pay interest on $10,000 for five days, and on $5,000 for the remaining 21 days in the month.
2. Calculating Interest
Interest on a revolving line of credit is typically calculated on a basis of actual days over a 360-day year. At Headway Capital, we use a 365-day year, as used in the example below. The formula to calculate interest on a revolving loan is the balance multiplied by the interest rate, multiplied by the number of days in a given month, divided by 365. In a month with 31 days, you'll multiply by 31 before dividing by 365. In a month with 30 days, you'll multiply by 30 before dividing by 365.
3. Revolving Interest Example
Let's say your principal balance is $10,000 from June 1 - 15 and your interest rate is 40%. Multiply 10,000 by 0.4, then multiply by 15 (days) and divide by 365. The interest fee for those 15 days is $164.38.
Say you paid the loan down to $3,000 on June 16. Now multiply 3,000 by 0.4, then multiply by 15 (days) and divide by 365. Your interest fee for the remainder of the month is $49.32. Add both figures together and you get $213.70, the total interest due for the month of June.
Why Choose a Revolving Line of Credit?
Flexibility
Revolving lines of credit can be used for any business expense. Many also offer flexible repayment terms, while business term loans require you to repay a specific amount at specific intervals of time.
Accessibility
Traditional term loans provide a lump sum, and you pay interest based on that total lump amount. With a revolving line of credit, you have an available credit limit. This lets you borrow what you need, when you need it, and pay interest only on the amount you borrow, not the total credit limit amount.
Revolving Line of Credit Calculator
We designed our True Line of Credit™ with small business owners in mind - it's flexible, fast and transparent. You have the ability to choose either weekly or monthly payments, depending on what best fits your business model, and you never have to worry about waiting weeks for funds to come through. You'll receive your requested funds as soon as the next business day. Use the revolving line of credit calculator below to see if you qualify and experience the Headway Capital difference for yourself.
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$26,000
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*This business loan calculator assumes a monthly interest rate of 3.3% and a 2% draw fee. Your interest rate and credit limit may vary based on your application. No draw fee in CO, GA, IN, NJ and OK.
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FAQ About Revolving Credit
How does a revolving line of credit work?
A revolving line of credit allows you to draw on funds up to your credit limit and repay them at any time, so long as you are making minimum required payments each payment period. As you repay, the funds are made available again as available credit. Because the funds are made available again to draw upon without another application, the line of credit is considered “revolving.”
What are some examples of revolving credit?
Some of the most common types of revolving credit include business lines of credit, personal lines of credit, home equity lines of credit and credit cards.
Is a line of credit better than a loan?
The type of business funding that is best for you can generally be determined by what the funding is needed for. Lines of credit are usually best for ongoing regular expenses like working capital or payroll. Loans (a broadly used word generally referring to term loans) are typically better for bigger, fixed-cost expenses.
