Revolving Line of Credit

A Business Owner's Guide to Business 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.

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 determined. With a revolving line of credit, interest is calculated based on your principal balance amount. You only pay interest on funds drawn.

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.

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.

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

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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.

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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.

True Line of Credit™ from Headway Capital

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. Apply today to see if you qualify for our revolving line of credit and experience the Headway Capital difference for yourself.

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*This business loan calculator assumes a monthly interest rate of 3.3%. Your interest rate may vary based on your application information.

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