Commercial Line of Credit Interest Rates
Interest rates on commercial lines of credit are not standardized — they range from roughly 7% to 60%+ APR depending on the lender type, the facility structure, and the borrower's credit and business profile. Understanding how rates are quoted and calculated helps you compare competing offers on equal terms.
How interest is typically calculated
Most commercial lines use simple interest on the outstanding daily balance. The formula is straightforward: Outstanding balance × Annual rate ÷ 365 × Number of days. A $40,000 draw at 15% annual rate outstanding for 60 days = $40,000 × 0.15 ÷ 365 × 60 ≈ $986 in interest.
Some lenders — especially merchant cash advance-style products marketed as lines of credit — use factor rates rather than APR. A 1.25 factor rate on a $50,000 draw means you repay $62,500 regardless of how quickly you pay. The effective APR can be extremely high on short-duration draws.
What drives your rate
Lenders price risk: the more uncertain they are about repayment, the higher the rate they charge.
- Credit score: Higher scores receive lower rates; below 650 significantly increases cost
- Time in business: 2+ years generally unlocks lower-rate programs
- Annual revenue: More revenue signals repayment capacity
- Existing debt: High debt-to-revenue ratios raise rates
- Collateral: Secured facilities typically have lower rates than unsecured
- Industry: Riskier industries (food service, construction) often pay more
Comparing rate types
Lenders quote rates in different ways, making direct comparison difficult. Always ask for the annual percentage rate (APR) inclusive of all fees.
| Quote type | What it is | Convert to APR? |
|---|---|---|
| APR | Annual rate including fees | Already comparable |
| Simple interest rate | Annual rate, fees excluded | Add fees to calculate APR |
| Monthly rate | Monthly charge × 12 ≈ APR | Multiply by 12 for rough APR |
| Factor rate (1.20) | Multiply draw by factor = total repay | Requires duration to calculate APR |
Fixed vs. variable rates
Bank lines of credit often carry variable rates tied to the prime rate or the Secured Overnight Financing Rate (SOFR). When benchmark rates rise, your borrowing cost rises too. Online and alternative lenders more often quote a fixed rate for the life of each draw. Fixed rates provide cost certainty; variable rates can save money when benchmarks fall.
Frequently Asked Questions
- What is the prime rate and how does it affect my line of credit?
- The prime rate is a benchmark interest rate that U.S. commercial banks use as a reference for lending. Many bank lines of credit are priced at prime plus a margin. When the Federal Reserve raises the federal funds rate, prime typically rises, which raises your cost on a variable-rate line.
- Can I negotiate my interest rate?
- Yes, especially with banks and credit unions where there is more flexibility. Having competing offers, strong financials, and an established relationship with the lender all improve your negotiating position.