Business Line of Credit Calculator
Understanding the Mechanics of a Business Line of Credit
A business line of credit (BLOC) is a flexible financing tool that provides capital on an as-needed basis. Unlike a standard term loan where you receive a lump sum and pay interest on the full amount, a line of credit allows you to draw only what you need. You only incur borrowing costs on the specific portion of the credit facility you have deployed.
Key Variables in Your Calculation
To accurately project the cost of capital, you must consider several factors beyond the simple borrowing rate:
- Total Credit Facility Size: This is the maximum ceiling of your line. While you don't pay for the unused portion, some lenders may charge an "unused line fee."
- Specific Draw Amount: The actual cash transferred to your business bank account. Borrowing costs are calculated based on this figure.
- One-time Draw Fee: Many lenders charge a percentage (often 1% to 3%) every time you request a "draw" or transfer from the facility.
- Yearly Borrowing Cost: The annualized percentage used to calculate the periodic charge on your outstanding balance.
- Repayment Duration: The window of time you have to pay back a specific draw. This often ranges from 6 to 24 months for small business lines.
Example Scenario
Imagine your business has a $100,000 credit facility. You decide to draw $20,000 to cover a seasonal inventory purchase with a 12% yearly borrowing cost and a 2% draw fee, repayable over 6 months.
In this case, your upfront draw fee would be $400. Over the six months, the finance charges on the $20,000 would be approximately $700 (depending on the amortization schedule). Your total cost to access that $20,000 would be roughly $1,100, resulting in a monthly installment of approximately $3,516.
Strategic Advantages for Cash Flow
The primary advantage of a business line of credit is its revolving nature. As you repay the principal portion of your draw, that capital becomes available to borrow again. This makes it an ideal solution for managing accounts receivable gaps, purchasing inventory, or handling unexpected emergency repairs without the need to re-apply for a new loan every time capital is required.