Yes, on most business lines of credit you pay interest only on the amount you draw, never on the full credit limit. Whether a lender offers an interest-only period, and how long it lasts, depends on the product terms, including the draw period and repayment triggers. And if your rate is variable, your payment can rise or fall with Prime even when your balance stays the same.
TL;DR:
- Lenders often calculate interest daily and bill monthly; check whether minimum payments also reduce principal, since that is not a pure interest only arrangement.
- When the draw period ends, your contract may require amortizing payments, a balloon payment, or renewal; SBA Express lines can run up to 10 years.
- Compare annual, setup, and renewal fees, principal based minimums, prepayment penalties, collateral, and guarantees; request the full fee schedule and payment formula in writing.
- Variable rates can raise payments even when balances stay fixed, so compare margins and floors, ask about caps, and test affordability at higher rates.
- Interest only structures suit temporary gaps, such as seasonal inventory or delayed receivables, but not permanent working capital without a clear repayment source.
Table of Contents
- How is interest calculated on a line of credit?
- What changes when the draw period ends?
- Which fees and minimums change the real cost?
- Do SBA-backed revolving lines offer interest-only payments?
- How do Prime moves change your interest-only payment?
- When does an interest-only line make sense?
- How can we help you compare and open a business line of credit?
- FAQ
- Sources
How is interest calculated on a line of credit?
Interest accrues on the outstanding principal only. If you have a credit limit and have drawn part of it, you owe interest on the amount drawn. Unused credit costs nothing in interest, though some lenders charge separate fees for keeping the line open.
A few mechanics shape your bill:
- Variable pricing: Most lines are priced as Prime plus a margin, so the rate moves when the benchmark moves.
- Accrual convention: Lenders typically calculate interest daily on the balance and bill it monthly, so a draw taken during the billing period costs only for the days it is outstanding.
- Minimum payments: Some lenders require interest plus a small percentage of principal, which is not a pure interest-only payment.
- Payment formula: The loan note controls. "Interest-only" describes a payment structure, not free borrowing.
Here is a simple worked example, illustrative only. Say you draw $25,000 at an annual rate of 10% (Prime plus a 3% margin, for the sake of the math). Annual interest is $2,500, so the monthly interest-only payment is about $208. Pay the same balance down to $15,000 and the payment drops to $125.
Lender disclosures show how this works in practice. A secured-line disclosure summarized by Bankrate allows monthly interest-only payments during the revolving period for lines of $100,001 and up, with a variable rate based on Prime and an annual fee of 0.25% of the committed amount.
For a deeper look at what small businesses typically pay, see our guide to business line of credit rates.
What changes when the draw period ends?
Most lines have two phases. The draw period (also called the revolving period) is when you can borrow, repay and borrow again. The repayment period begins when the line closes to new draws and you pay down what remains.
Interest-only payments are typical during the draw period, not afterward. Here is the usual lifecycle:
- You open the line and draw what you need.
- During the draw period, you make interest-only or minimum payments.
- The draw period ends, and the lender renews it, converts the balance to an amortizing payment, or asks for the remainder at maturity.
- In the repayment period, payments include principal and interest, so the monthly amount usually jumps.
Typical terms vary a lot, and a few points are worth confirming:
- Draw periods are set by the lender and written into the contract, so read that language before assuming interest-only applies.
- SBA Express can permit revolving lines for up to 10 years, according to SBA program guidance.
- Ask what happens at the end: amortization, a balloon payment, or a review and renewal.
- Home equity lines work similarly, with an interest-only draw period followed by repayment, as Bankrate explains for HELOCs. Business lines can follow that pattern, though terms differ.
For a closer look at timing, read how the line of credit draw period works.
Which fees and minimums change the real cost?
A low interest-only payment can hide other costs. Compare these before you sign:
- Annual or commitment fees: Some products charge a percentage of the committed line, such as the 0.25% fee noted above.
- Origination fees: A one-time charge to set up the line.
- Renewal or review fees: Charged when the lender reviews the line at the end of a term.
- Percent-of-principal minimums: These force some principal reduction every month.
- Prepayment conditions: Some bank products carry penalties, so ask whether paying down early costs anything.
- Collateral and guarantees: Secured lines require collateral, and many lenders ask for a personal guarantee. Unsecured lines trade that for different pricing. Our article on the advantages and disadvantages of unsecured lines covers the differences.
Pro Tip: Ask every lender for the full fee schedule and the exact payment formula in writing, then compare the same hypothetical draw across each offer to compare real monthly costs.
Do SBA-backed revolving lines offer interest-only payments?
Not automatically. SBA backing affects how long a line can run and how much of it is guaranteed, but the lender sets the payment structure.
What the SBA rules mean for you:
- Revolving lines are permitted only under certain SBA programs: SBA Express, Export Express and CAPLines, per the SBA's 7(a) loan type overview.
- SBA Express has a maximum loan amount of $500,000 and a 50% maximum SBA guarantee, and lenders negotiate the rate within SBA maximums.
- Eligibility, collateral, guarantee fees and payment structure depend on the lender and the program.
- An SBA guarantee influences which products lenders can offer and how they underwrite, but it does not promise an interest-only period.
If you are weighing this route, our SBA loans page outlines what we offer.
How do Prime moves change your interest-only payment?
When a line is priced from Prime, a benchmark increase raises your interest-only payment even if your drawn principal is unchanged. Many owners underestimate this exposure because the balance looks stable while the bill climbs.
The Federal Reserve's Prime rate series showed Prime at 7.00% on October 7, 2026. At that benchmark, a 3% margin puts the line at 10%, the rate used in the example above.
Ways to manage rate risk:
- Pay down principal when you have spare cash, since each dollar repaid lowers interest.
- Ask whether the lender offers rate caps or a fixed-rate alternative.
- Compare margins and floors, because a floor limits how much a falling Prime helps you.
- Stress-test your budget at a higher rate than today.
Market conditions matter too. The Fed's July 2026 Senior Loan Officer survey reported that lending standards and demand for small-firm commercial and industrial loans were basically unchanged in the second quarter of 2026. That is context, not an approval rule for your business.
When does an interest-only line make sense?
Our editorial view: an interest-only structure works best when your cash flow is lumpy and your borrowing is temporary. Most owners focus on the monthly payment and overlook the exit. A line that is cheap to carry but hard to retire is a worse deal than one with a slightly higher payment and a clear paydown path.
Good fits include seasonal inventory purchases, short-term bridge financing, and covering the gap while receivables come in. Poor fits are permanent working capital needs that never get repaid.
Use this checklist to compare offers:
- Payment formula (pure interest-only or interest plus minimum principal)
- Draw period length
- Fees: annual, origination, renewal
- Renewal and end-of-term terms
- Collateral and personal guarantee requirements
Next, run the example calculation on each offer, request the fee schedule, and confirm renewal terms before you sign. For background, our explainer on what a business line of credit is covers the basics.
— Capital
How can we help you compare and open a business line of credit?
We offer business lines of credit with pricing from 1.2% per month, along with working capital loans, equipment financing, term loans and SBA loans. Our stated advantages include faster funding and approval for a broad range of credit profiles, including owners who were turned down elsewhere.
When you compare offers, whether ours or anyone's, line up these points:
- The exact payment formula
- Draw period length
- Fee schedule
- Renewal terms
See the details on our business line of credit page, or browse our funding solutions and apply when you are ready.
This article is general information, not a substitute for advice from a qualified financial advisor. Consult a qualified financial professional about your own circumstances before acting on anything here.
FAQ
Do business lines of credit charge interest on the full limit?
No. Interest accrues only on the amount you have drawn and not yet repaid. Unused credit generally costs nothing in interest, though some lenders charge a commitment or annual fee on the limit.
Is it hard to get approved for an interest-only line?
It depends on the lender and the product. Underwriting looks at time in business, revenue and credit profile, and some online lenders position lines for businesses with at least one year in operation, as Bankrate's short-term loan review describes. Lender standards shift with market conditions.
Can my LLC get a business line of credit?
Yes, an LLC can generally apply for a business line of credit in its own name. Lenders typically look at the business's revenue and history, and may ask for a personal guarantee from the owners.
What happens when the interest-only period ends?
Payments usually shift to principal plus interest, so your monthly amount rises. The lender may also renew the line, require a balloon payment, or convert the balance to a repayment schedule, depending on your contract.