Business Line of Credit Interest Calculation Methods: 360 vs 365 Day
Quick Answer
Your business line of credit interest is calculated using either a 360-day or 365-day convention, and the difference costs you real money. A 360-day method on a $100,000 balance at 10% generates $10,139 in annual interest versus $10,000 with 365-day — a $139 difference per $100K. Always ask your lender which day count and balance method they use before comparing rates.
The method your lender uses to calculate interest can meaningfully impact your borrowing costs. This guide explains 360-day vs. 365-day calculations, daily balance methods, and how to compare lenders accurately.
Key Takeaways
- 360-day interest calculation costs ~1.4% more than 365-day on the same stated rate ($139 extra per $100K per year at 10%)
- Average daily balance is the most common method for revolving LOCs — your balance each day matters, not just month-end
- Leap years add one extra day of interest on 365-day method and two extra days on 360-day method
- Early repayment saves significantly with daily balance methods — paying off a $100K balance on day 15 costs $41, not $417
- Convert 360-day rates to 365-day equivalent when comparing lenders: Effective Rate = Stated Rate × (365 ÷ 360)
Why Interest Calculation Method Matters
Different calculation methods can result in meaningful variance in actual interest paid:
| Calculation Method | $100,000 at 10% for 1 Year |
|---|---|
| 365/365 | $10,000.00 |
| 360/365 | $10,138.89 |
| 30/360 | $10,000.00 |
The difference: ~1.4% more with 360-day method ($138.89 per $100,000 per year)
Day Count Conventions Explained
1. Actual/365 (365/365)
Most common for business lines of credit:
Daily Interest = Principal × (Rate ÷ 365)
Annual Interest = Daily Interest × Days in Year
Example:
- Principal: $100,000
- Rate: 10%
- Daily Interest: $100,000 × (0.10 ÷ 365) = $27.40
- Annual Interest (365 days): $27.40 × 365 = $10,000
2. Actual/360 (360/365)
Often used by commercial banks:
Daily Interest = Principal × (Rate ÷ 360)
Annual Interest = Daily Interest × 365 (or actual days)
Example:
- Principal: $100,000
- Rate: 10%
- Daily Interest: $100,000 × (0.10 ÷ 360) = $27.78
- Annual Interest (365 days): $27.78 × 365 = $10,138.89
Result: You pay $138.89 more annually - effectively 10.14% instead of 10%
3. 30/360 (Bond Basis)
Treats all months as 30 days:
Monthly Interest = Principal × (Rate ÷ 12)
Example:
- Principal: $100,000
- Rate: 10%
- Monthly Interest: $100,000 × (0.10 ÷ 12) = $833.33
- Annual Interest: $833.33 × 12 = $10,000
Effective Rate Comparison
Nominal 10% Rate, Different Methods
| Day Count | Daily Rate | Effective Annual Rate | Annual Interest on $100K |
|---|---|---|---|
| Actual/365 | 0.02740% | 10.00% | $10,000 |
| Actual/360 | 0.02778% | 10.14% | $10,139 |
| 30/360 | 0.02740% | 10.00% | $10,000 |
At Higher Balances
| Balance | 365-Day Interest | 360-Day Interest | Difference |
|---|---|---|---|
| $100,000 | $10,000 | $10,139 | $139 |
| $250,000 | $25,000 | $25,347 | $347 |
| $500,000 | $50,000 | $50,694 | $694 |
| $1,000,000 | $100,000 | $101,389 | $1,389 |
Balance Calculation Methods
1. Average Daily Balance
Most common for revolving lines:
Average Daily Balance = Sum of Daily Balances ÷ Days in Period
Interest = Average Daily Balance × (Rate ÷ 365) × Days
Example:
- Day 1-10: $50,000 balance
- Day 11-20: $75,000 balance
- Day 21-30: $25,000 balance
Calculation:
- Sum of balances: ($50,000 × 10) + ($75,000 × 10) + ($25,000 × 10) = $1,500,000
- Average Daily Balance: $1,500,000 ÷ 30 = $50,000
- Interest at 10%: $50,000 × (0.10 ÷ 365) × 30 = $411
2. Daily Balance Method
Interest calculated on each day’s actual balance:
Daily Interest = Balance × (Rate ÷ Days in Year)
Monthly Interest = Sum of Daily Interests
3. Beginning-of-Month Balance
Less common, calculates on month-start balance:
Monthly Interest = Opening Balance × (Rate ÷ 12)
Warning: This method penalizes early-month paydowns.
Leap Year Impact
Actual/365 Method
In leap years (366 days), you pay one extra day of interest:
| Year | Days | Interest on $100K at 10% |
|---|---|---|
| Regular | 365 | $10,000 |
| Leap | 366 | $10,027 |
Actual/360 Method
Leap year means two extra days of interest:
| Year | Days | Interest on $100K at 10% |
|---|---|---|
| Regular | 365 | $10,139 |
| Leap | 366 | $10,167 |
Payment Timing Impact
When Interest Is Charged
| Timing | Interest Calculation | Impact |
|---|---|---|
| Beginning of month | On upcoming month’s balance | Pay interest in advance |
| End of month | On actual usage | Pay for what you used |
| On payment date | On days since last payment | Accurate to transaction |
Early Payment Example
$100,000 balance, 10% rate, paid off on day 15:
| Method | Calculation | Interest |
|---|---|---|
| Daily Balance | $100,000 × (0.10 ÷ 365) × 15 | $41.10 |
| Monthly (prorated) | $833.33 × (15 ÷ 30) | $416.67 |
Difference: Paying daily balance saves $375.57
How to Compare Lenders
Step 1: Ask About Day Count
“What day count convention do you use - 360 or 365?”
Step 2: Check Balance Method
“Is interest calculated on average daily balance or another method?”
Step 3: Calculate Effective Rate
Convert any 360-day method to equivalent 365-day rate:
Effective Rate = Stated Rate × (365 ÷ 360)
Example:
- Stated Rate (360-day): 10%
- Effective Rate: 10% × (365 ÷ 360) = 10.14%
Step 4: Compare True Costs
| Lender | Stated Rate | Day Count | Effective Rate |
|---|---|---|---|
| Bank A | 10.00% | 360 | 10.14% |
| Bank B | 10.10% | 365 | 10.10% |
| Better Deal | Bank B |
Hidden Costs in Calculation Methods
1. Compounding Frequency
| Compounding | Effective Rate (10% nominal) |
|---|---|
| Annual | 10.00% |
| Monthly | 10.47% |
| Daily | 10.52% |
2. Interest on Interest
Some lenders capitalize unpaid interest:
- Unpaid interest added to principal
- Future interest charged on larger balance
- Can increase effective rate significantly
3. Minimum Interest Charges
| Lender | Minimum Monthly Interest | Impact on Small Balances |
|---|---|---|
| A | $0 | None |
| B | $25 | $10K balance = 3% effective rate |
| C | $50 | $10K balance = 6% effective rate |
Real-World Example
Scenario: $200,000 Average Balance, 12% Stated Rate
| Factor | Bank A | Bank B |
|---|---|---|
| Day Count | 360 | 365 |
| Balance Method | Average Daily | Average Daily |
| Compounding | Monthly | Monthly |
| Effective Rate | 12.17% | 12.00% |
| Annual Interest | $24,335 | $24,000 |
| Savings with Bank B | - | $335/year |
Questions to Ask Lenders
- What day count convention do you use (360 or 365)?
- How is the daily balance calculated?
- When is interest capitalized (if at all)?
- Is there a minimum monthly interest charge?
- How does early repayment affect interest calculation?
- Do you charge interest on accrued interest?
Related Guides
- Business Line of Credit APR Calculator
- How to Calculate True Cost of Business LOC
- Variable Rate LOC Cost Calculator
- Business LOC Fees Explained 2026
- Interest-Only vs Amortizing LOC
Frequently Asked Questions
What is the difference between 360-day and 365-day interest calculation on a business LOC?
A 360-day convention divides your annual rate by 360 instead of 365, resulting in a higher daily rate. Over a full year, this produces ~1.39% more interest — $139 extra per $100,000 at 10%. Commercial banks commonly use the 360-day method.
How does the average daily balance method work for a business line of credit?
The lender sums your outstanding balance for each day of the billing period, divides by the number of days, then applies the daily rate to that average. This means every draw and repayment within the month affects your interest charge, not just the starting or ending balance.
Does the interest calculation method really make a significant difference on business LOC costs?
Yes, especially at higher balances. On $500,000 at 10%, the 360-day method costs $694 more annually than 365-day. At $1,000,000, the difference grows to $1,389. Always convert to effective annual rate when comparing lenders using different methods.
How does a leap year affect business line of credit interest charges?
With the 365-day method, a leap year adds one extra day of interest ($27 per $100K at 10%). With the 360-day method, it adds two extra days ($56 per $100K). While modest, it’s a real cost to account for in annual budgeting.
What questions should I ask my lender about LOC interest calculation?
Ask: (1) What day count convention do you use — 360 or 365? (2) Is interest on average daily balance or another method? (3) When is unpaid interest capitalized? (4) Is there a minimum monthly interest charge? (5) How does early repayment affect interest?
Can I switch interest calculation methods on my existing business line of credit?
Typically no — the calculation method is set in your loan agreement. However, you can refinance with a different lender that uses a more favorable method. When evaluating refinancing, factor in any origination fees or early termination costs against the interest savings from the better calculation method.