How to Calculate Line of Credit Payments  Small Business
By Updated March 01, 2019
If you run a business, a line of credit can be a useful way to meet shortterm borrowing needs. A business line of credit works much like a credit card in that you borrow only what you need and not until you need the funds. Lenders have differing policies for setting payment amounts, but most use the average daily balance method for figuring finance charges. This makes calculating line of credit payments a straightforward task.
What is a Line of Credit?
A line of credit is a revolving credit account. Like a credit card account, it has a borrowing limit set by the lender. You don’t receive a lump sum as is the case with a conventional business loan. Instead, you borrow only when you make purchases, and you can use the account for any purpose. These features make a line of credit a good choice for shortterm borrowing. There is no formula for the monthly payment amount. The lender determines payment size based on factors such as the interest rate, outstanding balance and terms of the line of credit.
Calculating interest on lineofcredit payments is usually done using the average daily balance method. The lender figures the average balance during a billing period and charges interest that is a proportion of the annual interest calculated based on the number of days in the billing period.
Line of Credit Payment Calculation

Find Monthly Interest Percentage

Calculate the percentage interest for the billing period, which is called the periodic rate. Divide the annual interest rate by 365 and multiply by the number of days in the billing period. For example, if the annual rate is 7.3 percent and there are 30 days in the billing period, you have 7.3 percent divided by 365 and then multiplied by 30, so the interest rate equals 0.6 percent.

Calculate Average Balance of New Purchases

Multiply the amount of each purchase made during the billing period by the number of days left in the period when the purchase was made. Divide this amount by the number of days in the billing period. Add the results together. Suppose you made two purchases for $100 each, one with 20 days remaining and one with 10 days remaining. You have 20 times $100 divided by 30 and10 times $100 divided by 30. Adding these together equals an average daily balance for new purchases of $100.

Compute Average Daily Balance

Add the average balance of new purchases from Step 2 to the account balance at the beginning of the billing period to find the average daily balance for the line of credit. If the initial balance is $1,000 and the average balance of new purchases is $100, the average daily balance equals $1,100.

Calculate Line of Credit Payment Interest

Multiply the interest percentage for the billing period from Step 1 by the average daily balance. If the interest rate is 0.6 percent and the average daily balance is $1,100, the interest comes to $6.60. Add this amount to the ending balance and subtract your payment to find the beginning balance for the next billing cycle.
My brother suggested I might like this blog. He used to be entirely right. This submit truly made my day. You can not consider simply how much time I had spent for this information! Thank you!