How a draw is priced, and when interest starts running

Interest on a business line of credit generally accrues from the advance date, on the balance outstanding, day by day. Repay on day 12 and you are charged for 12 days. There is normally no interest-free grace period — that feature belongs to credit cards and it is one of the real differences between the two products.

Two mechanical details decide the exact number.

Illustrative only — $30,000 drawn and held 30 days at a stated 11.5%. On a 365-day basis: $283.56. On a 360-day basis: $287.50. Small. Held for a full year on $30,000, the same convention costs $3,497.92 instead of $3,450.00. On larger balances it stops being trivial.

Other timing details worth confirming

Draw fees against the rate, over a year of real usage

The comparison that matters is not two rates. It is two total costs, run against the way you actually use the line.

Option one: a 1% draw fee and a 10.5% stated rate. The fee is $400 a draw, $4,800 a year. Interest on a 360-day basis is about $2,520. Total $7,320.

Option two: no draw fee and a 13.5% stated rate. No fees. Interest of about $3,240. Total $3,240.

The facility with the higher rate costs less than half as much, because this borrower's cost is driven by the number of draws rather than by days outstanding. Reverse the usage — one draw held eleven months — and the ranking reverses with it.

Two numbers let you run this for yourself: how many draws you expect in a year, and the average days each is held.

The fees that run whether you draw or not

Add those to the per-draw comparison before deciding which facility is cheaper.

Reading your statement

Take one statement and check it. Multiply each day's balance by the daily rate — the annual rate divided by 360 or 365, whichever the agreement specifies — and add up the days. The total should match the interest charged. If it does not, the difference is either a fee or a convention you have not found yet, and it is worth asking which.

The practical takeaway

Because interest runs from the advance date and stops at repayment, a line rewards discipline in a way a term loan does not. Drawing on Thursday for a payroll that clears Friday and repaying when the customer settles on the 15th costs a handful of days of interest. Drawing the same amount at the start of the month because it might be needed costs the whole month.

The corollary: only draw what you need, when you need it, and repay as soon as the receipt lands. On a facility priced on days outstanding, that behaviour is worth more than a point on the rate.

What to ask before you sign the line

1. Is interest computed on a 360-day or 365-day year, and are actual days counted?
2. Is there a per-draw fee, and is it flat or a percentage?
3. What is the unused line fee, and how is the undrawn balance averaged?
4. Is there a minimum draw, a minimum interest charge, or a minimum utilisation?
5. When is a payment credited — on receipt or on clearing — and is it applied to accrued interest first?
6. If the rate is indexed, when does an index change take effect on my balance?
7. Is there a clean-up requirement, and what exactly does it say?
8. What is the renewal date, and what triggers a re-underwrite?

Ask them in one message and keep the reply. Every answer is a term already written into the agreement, so a lender that will not put them in an email is declining to tell you what you are about to sign.