Business Line of Credit Calculator

A credit facility charges for two different things. Interest runs on what is drawn, and a commitment fee runs on what is not. On the defaults, 200,000 drawn against a 500,000 limit at 8% costs 16,000 of interest across a year, and the 300,000 sitting unused costs 750 at a 0.25% fee. Total 16,750, which against the 200,000 actually borrowed is an effective 8.38%.

The fee is a rate on the headroom

That effective rate has a simple shape: the headline rate plus the fee multiplied by the headroom-to-drawn ratio, or r + f(1/u − 1) where u is utilisation. It rises sharply as utilisation falls. On the same 500,000 facility at 8% and 0.25%, drawing half the limit costs an effective 8.25%; drawing a fifth costs 9.00%; drawing a tenth costs 10.25%; drawing a twentieth costs 12.75%. At full utilisation the fee disappears and the effective rate is the headline 8.00%. A lightly used facility is not a cheap facility.

What the commitment fee actually buys

The fee is not a bank charging for nothing. Under the Basel framework an undrawn commitment is an off-balance-sheet exposure the lender has to hold capital against, because the borrower can call on it at any time. That capital has a cost whether or not the facility is ever drawn, and the commitment fee is where it is recovered. IAS 23 puts the two charges in the same category from the borrower's side: borrowing costs are interest and other costs incurred in connection with the borrowing of funds, so the fee is part of the price of the money rather than an extra on top of it.

Comparing it with a term loan

A term loan sized to the expected need charges interest on its whole principal for its whole life, and a facility charges only on the average balance plus the fee. At 30% utilisation of a 500,000 limit, the facility costs 12,875 across a year against 12,000 for a 150,000 term loan at the same 8%, so the facility is the more expensive of the two by 875. What the extra 875 buys is the right to draw the other 350,000 without asking. Whether that is worth 875 depends on how likely the need is, which is not a number this calculation contains.

How much of the cost is which

At the default 40% utilisation the fee is 750 of a 16,750 total, or 4.48% of the cost. That share grows as utilisation falls and shrinks as it rises, which is why the two inputs that move the answer most are the drawn balance and the number of months, each shifting the total by roughly one percent for every one percent of their own. The unused fee rate moves it by about 0.04% per one percent at these figures, and by far more on a facility that sits idle.

What sits outside

Arrangement and renewal fees charged when the facility is set up or rolled, minimum-draw or minimum-utilisation clauses, covenants and the cost of breaching them, rate changes across the period, the timing of draws and repayments within a month, and any requirement to clear the balance to zero for part of the year.