Master your business or personal cash flow with our Line of Credit Calculator. Whether you're managing a Business Line of Credit (LOC) or a HELOC, this tool helps you model revolving debt, calculate interest costs, and determine the optimal repayment strategy to stay liquid and profitable.
What is a Line of Credit?
A Line of Credit (LOC) is a flexible loan from a financial institution that consists of a defined amount of money that you can access as needed and repay either immediately or over a prescribed period of time. Unlike a term loan, where you receive a lump sum and pay interest on the entire amount from day one, a line of credit charges interest only on the amount you actually borrow (draw).
This revolving nature makes it an essential tool for managing working capital, covering short-term operational expenses, or bridging gaps in cash flow (e.g., waiting for receivables). Once you repay the borrowed amount, that credit becomes available to use again, similar to a credit card but typically with lower interest rates and higher limits.
Key Features of a Line of Credit
- Revolving Balance: You can borrow, repay, and borrow again up to your credit limit.
- Interest on Usage: You only pay interest on the funds you have drawn, not the total limit.
- Variable Rates: Most LOCs have variable interest rates tied to a benchmark like the Prime Rate.
- Draw Period: A specific timeframe (e.g., 5-10 years) during which you can access funds.
How to Use This Calculator
Our Line of Credit Calculator is designed to help you visualize the cost of borrowing and plan your repayment. Here's how to get the most out of it:
1. Enter Credit Details
Input your total Credit Limit and the current Annual Interest Rate (APR). This establishes the boundaries of your credit facility.
2. Define Usage
Enter the Current Balance (Draw) you intend to borrow. The calculator will show you how much credit remains available.
3. Set Repayment Strategy
Adjust the Planned Monthly Payment to see how it affects your payoff timeline and total interest costs.
4. Analyze Results
Review the Total Interest, Payoff Time, and Utilization Ratio to ensure your borrowing is sustainable.
Line of Credit vs. Term Loan
Choosing between a line of credit and a traditional term loan depends on your specific financial needs.
| Feature | Line of Credit | Term Loan |
|---|---|---|
| Structure | Revolving (borrow, repay, repeat) | Lump sum (one-time disbursement) |
| Interest | Paid only on amount drawn | Paid on total loan amount |
| Best For | Working capital, emergencies, uneven cash flow | Large capital investments (equipment, real estate) |
| Rates | Typically variable | Typically fixed |
Pros and Cons of a Line of Credit
Like any financial product, a line of credit has advantages and disadvantages. Understanding these can help you decide if it's the right choice for your situation.
Pros
- Flexibility: Borrow only what you need, when you need it.
- Interest Savings: Pay interest only on the amount drawn, not the full limit.
- Reusability: Once repaid, funds are available again without reapplying.
- Cash Flow Management: Smooth out uneven income or cover unexpected expenses.
Cons
- Variable Rates: Interest rates can rise, increasing your costs.
- Fees: Annual fees, draw fees, and non-usage fees can add up.
- Risk of Overspending: Easy access to funds can lead to unnecessary debt.
- Collateral: Secured lines put your assets at risk if you default.
Revolving Credit vs. Installment Credit
To truly understand a line of credit, you must distinguish it from installment credit.
- Revolving Credit (LOC, Credit Cards): You are given a maximum limit. You choose when to borrow and how much. As you pay it back, your credit becomes available again. The monthly payment often fluctuates based on the balance.
- Installment Credit (Mortgages, Auto Loans): You borrow a fixed sum once. You repay it in equal monthly installments over a set term. Once paid off, the account is closed; you cannot borrow from it again without a new application.
Hidden Costs to Watch For
While the interest rate is the most visible cost, lines of credit often come with ancillary fees that can increase your effective borrowing cost (APR).
Fee Types
Origination Fee: Charged upfront to open the line (often 1-2%).
Maintenance Fee: A monthly or annual charge just for having the account (e.g., $50/month).
Transaction Fee: Charged each time you make a draw.
Inactivity Fee: Charged if you don't use the line for a certain period.
Personal vs. Business Lines of Credit
Lines of credit aren't just for businesses. Individuals often use them in the form of a Home Equity Line of Credit (HELOC) or a Personal Line of Credit (PLOC).
HELOC (Secured)
A HELOC uses your home as collateral. Because it is secured, rates are typically much lower than unsecured debt. The interest may also be tax-deductible if used for home improvements. However, the risk is high: failure to repay can result in foreclosure.
Personal Line of Credit (Unsecured)
This requires no collateral but relies heavily on your credit score. Rates are higher than HELOCs but usually lower than credit cards. It is an excellent safety net for irregular income earners or unexpected medical bills.
Qualifying for a Business Line of Credit
Lenders look at several factors when approving a line of credit. While requirements vary, most will evaluate the "5 Cs of Credit":
- Character: Your credit history and reputation. A credit score of 680+ is typically preferred for prime rates.
- Capacity: Your ability to repay. Lenders calculate your Debt Service Coverage Ratio (DSCR) to ensure you have enough cash flow.
- Capital: The money you have invested in the business.
- Collateral: Assets you can pledge to secure the loan (e.g., inventory, equipment, real estate).
- Conditions: The purpose of the loan and economic conditions.
Strategic Use of a Business Line of Credit
A business line of credit is a powerful tool for growth when used correctly. It provides the agility to seize opportunities—like purchasing inventory at a discount or hiring staff for a new project—without waiting for long approval processes.
Managing Utilization
Your Credit Utilization Ratio (Current Balance / Credit Limit) is a key metric. Keeping this ratio below 30% is generally recommended to maintain a healthy credit score and ensure you have a buffer for emergencies. High utilization can signal financial distress to lenders.
The Cost of "Just in Case"
Even if you don't use your line of credit, there may be costs involved. Many lenders charge an annual fee or a "non-usage fee" to keep the line open. Always factor these into your cost of capital calculations using our WACC Calculator.
When to Use a Line of Credit vs. Other Financing
It's crucial to match the financing type to the need. Use a line of credit for short-term needs like payroll, inventory, or seasonal slumps. For long-term investments like buying a building or heavy machinery, a Commercial Loan with a fixed term and rate is usually better.
If you are looking to purchase a property, consider using a Commercial Mortgage Calculator to estimate your payments. For analyzing the profitability of a specific investment, our ROI Calculator can help you decide if the return justifies the cost of borrowing.
Frequently Asked Questions
Related Tools
To fully understand your financial position, consider using our other calculators:
- Cash Flow Calculator: Analyze your operating cash flow to see if you can support debt payments.
- Debt Consolidation Calculator: See if combining debts into a single loan could save you money.
- DSCR Calculator: Calculate your Debt Service Coverage Ratio to see if you qualify for financing.