Question 1

How is the effective APR on a business line of credit calculated?

Accepted Answer

Effective APR on a business line of credit combines the interest rate (usually Prime + spread) with all fees: annual maintenance fees, origination fees, and unused line fees. The formula divides total annual cost by average borrowed amount. For example, a $100,000 line at Prime + 2.5% with $500 annual fee and 60% utilization yields an effective APR higher than the nominal rate.

Question 2

When should I choose a line of credit over a term loan?

Accepted Answer

Choose a business line of credit when you need flexible, ongoing access to working capital for seasonal cash flow, inventory purchases, or unpredictable expenses. Term loans are better for one-time purchases with fixed repayment needs. LOCs offer revolving access and interest-only payments during draw periods, while term loans provide fixed rates and predictable payments.

Question 3

What fees should I expect with a business line of credit?

Accepted Answer

Common business line of credit fees include: annual maintenance fees ($250-$1,500+), origination or commitment fees (0.5%-2% of credit limit), unused line fees (0.25%-0.5% on undrawn amounts), and per-draw transaction fees ($15-$50). Some lenders also charge wire transfer fees or account maintenance fees. Always request a full fee schedule before signing.

Question 4

How does utilization rate affect my line of credit costs?

Accepted Answer

Line of credit utilization directly impacts your total borrowing cost. Higher utilization means more interest paid but lower unused line fees. At 25% utilization on a $100,000 line at 10% rate, you pay $2,500/year in interest. At 75% utilization, interest rises to $7,500/year but you maximize the value of available credit. Some lenders offer rate discounts for lower utilization.

Question 5

How does Prime rate changes affect my business line of credit?

Accepted Answer

Most business lines of credit have variable rates tied to the Wall Street Journal Prime rate. When the Federal Reserve raises rates, your LOC rate increases immediately by the same amount. A 2% Prime rate increase on a $60,000 balance at Prime + 2% adds $1,200/year in interest costs. Consider stress-testing your budget for potential rate increases before drawing heavily.

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Understanding Business Lines of Credit

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⚖️ When to Choose LOC vs Term Loan