Revolving Line of Credit
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How Revolving Line of Credit Works
A revolving line of credit is a flexible method of business finance. Rather than borrowing a fixed amount of money once in a term loan, a revolving line of credit allows your business to borrow as much as you need (up to your credit 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.
How Interest is Calculated on Revolving Credit
To use a revolving loan as intended, you should be clear on how it works — and especially on how interest is calculated. With revolving credit, interest is calculated based on your principal balance amount. Knowing the structure of a revolving loan will assist you in calculating the interest you’ll owe.
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.
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, so that’s what we’ll use in this example. 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. So in a month with 31 days, you’ll multiply by 31 before dividing by 365, and in September you’ll multiply by 30 before dividing by 365.
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. Your interest expense 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 15 days and divide by 365. Your interest expense for the remainder of the month is $49.32. Add both figures together to get $213.70, your total interest expense for the month of June.
Headway Capital True Line of Credit
We designed our true line of credit with the 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. Plus, there are no hidden fees or terms — we provide you with all your loan information up front.
Apply today and you can experience the Headway Capital true line of credit for yourself.