Interest on a revolving facility is calculated daily, which makes the timing of every drawing and every repayment a small financial decision. Across a year those decisions add up.
The short version
The calculation
The annual rate is divided by 365 to give a daily rate, and that is applied to whatever the balance is at the close of each day. Those daily amounts are added together across the month and charged as one figure, ordinarily on the last day of the month or the first of the next.
The consequence is that the shape of the balance through the month matters as much as its average. A business drawing $100,000 on the first and repaying on the twenty-eighth pays for twenty-seven days. The same business drawing on the twentieth and repaying on the twenty-eighth pays for eight, on identical activity.
That is why anything that shortens the outstanding period is worth doing, and why the largest saving available on most facilities is not a better rate but a shorter set of days. Both are worth pursuing and only one requires a lender to agree to anything.
Daily rate
Annual over 365
Applied to
The closing balance
Accumulated
Across the month
Charged
At month end
Worked days
Illustrative at an indicative 13%. The arithmetic is a daily rate of about 0.0356% applied to the balance.
| Days outstanding | Interest on $100,000 | Equivalent as a share of the amount |
|---|---|---|
| 3 | ~$107 | 0.11% |
| 7 | ~$249 | 0.25% |
| 14 | ~$499 | 0.50% |
| 30 | ~$1,068 | 1.07% |
| 60 | ~$2,137 | 2.14% |
| 90 | ~$3,205 | 3.21% |
Illustrative on stated assumptions and rounded. Not a quote or offer of credit.
Reading the table
Individually, a few days of interest on a drawing is a small number, which is exactly why the habits around timing are so easily neglected. A business that leaves a $100,000 receipt sitting for three days before applying it has paid $107 for nothing, and will not notice.
Repeated across a year, on a business cycling money through a facility every few weeks, the same habit costs somewhere between $1,000 and $2,000. That is a real amount, it required no negotiation to save, and no lender was involved in the decision.
The same arithmetic runs the other way on drawings. Money drawn a week before it is needed, because the transfer was convenient to do then, is a week of interest bought for nothing. Drawing on the day the payment leaves is the same discipline applied at the other end.
What affects the settlement date
01
A transfer initiated on a Friday afternoon may not settle until Monday or Tuesday, and interest accrues across the gap. On a facility used weekly, the day of the week a business habitually transfers is worth looking at once.
02
A transfer between a facility at one institution and a trading account at another does not settle instantly. Where the facility and the account are at the same bank, it ordinarily does, which is one practical argument for keeping them together.
03
Most institutions have a daily cut-off after which a transaction is processed the following business day. A transfer made at four in the afternoon and one made at eight in the evening can settle a day apart.
04
A deposit showing in the account is not always available to apply against a facility. Where a receipt is subject to clearance, the days between credit and clearance are days the facility is still charging.
The compounding detail
On most revolving facilities the month-end interest charge is applied to the facility itself, which means it becomes part of the drawn balance and accrues interest from the following day. A business at or near its limit can also find the charge pushing the balance over, producing an excess fee for a transaction it did not make. Neither is unusual and both are avoidable by keeping enough headroom to absorb a month of interest, which on a large facility is a larger number than it first appears.
The habits
01
Making the transfer to the facility part of the same routine as reconciling the receipt, rather than a separate task that happens weekly, removes the decision entirely. The saving is small each time and continuous, and it requires no decision once the routine exists.
02
Money drawn early sits in a trading account earning nothing while the facility charges. Timing the drawing to the payment removes those days, and on a business that pays suppliers in batches the alignment is straightforward to arrange.
03
The interest charge lands on a predictable date and is added to the balance. Where the facility runs close to its limit, knowing roughly what that charge will be and leaving room for it prevents an excess produced by the lender’s own transaction.
Two accounts or one
An overdraft and a separately held line differ mechanically in ways that affect both cost and control.
| Feature | Overdraft on the account | A separate facility |
|---|---|---|
| Drawing | Automatic, by spending | A deliberate transfer |
| Repaying | Automatic, by receiving | A deliberate transfer |
| Settlement delay | None | Possible, especially across institutions |
| Days of interest lost to timing | Effectively none | A few per cycle unless managed |
| Visibility of borrowing | Blended into the account | A separate balance |
| Ease of drifting into permanent use | High | Lower |
An overdraft is mechanically the more efficient of the two, because every deposit repays it instantly. A separate facility is behaviourally the safer, because using it requires a decision. Which matters more depends on the business.
Worked example
A wholesaler cycles roughly $90,000 through its facility every three weeks, drawing to pay suppliers and repaying as customer receipts land. Across a year that is about seventeen cycles.
The business habitually applies receipts on Fridays, which on average leaves three days between a receipt clearing and it reaching the facility. It also draws on Mondays for payments made on Wednesdays, adding two days at the other end. Five days per cycle, seventeen cycles, at an indicative 13% on $90,000.
That is roughly $1,360 a year, for nothing. Changing both routines costs nothing, requires no conversation with the lender, and saves more than most rate negotiations achieve on a facility of that size.
Illustrative figures
Illustrative on stated assumptions and rounded. Not a quote or offer of credit.
The other end
Where an automatic payment or a direct debit would take the balance past the limit, the institution either allows the excess and charges a fee, or declines the transaction and charges a dishonour fee. Which of those happens depends on the arrangement and on the institution’s discretion, and neither outcome is good.
The dishonour is the worse of the two commercially, because the party expecting the payment now knows. A supplier whose direct debit failed treats the account differently afterwards, and the cost of that is not the fee.
Both are avoided by the same discipline, which is treating a portion of the limit as unavailable. A facility run to its last dollar has no capacity to absorb an unexpected debit or the month-end interest charge, and the amount of headroom required to avoid that is small relative to the consequences.
Method
The mechanics described are those in general use across New Zealand business revolving facilities. Settlement timing, cut-offs, clearance rules and how interest is applied at month end vary between institutions, and a business unsure of any of them can establish the answer in one call.
The daily rate convention used in the worked figures divides the annual rate by 365. Some agreements use a different day-count basis, which changes the arithmetic slightly and does not change the principle that days are what is being paid for.
Nothing here is financial advice. This site is not a lender, a broker or a registered financial adviser, and the terms of any particular facility are set out in its agreement.
Setting it up
Each removes a recurring decision, and a removed decision is worth more than a remembered one.
01
Transfers between them are ordinarily immediate rather than subject to interbank settlement, which removes the timing loss entirely. Where that is not possible, knowing the settlement behaviour is the next best thing.
02
A fixed amount moved to the facility on a regular date, treated as non-negotiable. On a facility with no schedule this supplies the discipline the product lacks, and it can always be reversed if the money is needed.
03
Most institutions can notify when a balance passes a threshold. Set below the limit rather than at it, that turns an approaching excess into a warning rather than a fee.
04
Knowing when the monthly charge lands, and roughly how large it will be, prevents the lender’s own transaction pushing a tight balance over the limit.
What to check on a statement
The interest charge is the first, and it is worth comparing against a rough expectation rather than accepting. A charge materially higher than the balance implies is a reason to ask, and rate changes on a variable facility do not always arrive with a great deal of prominence.
The fees are the second. Line fees, review charges, excess fees and dishonour fees all appear on the statement rather than in a notice, and a fee that recurs unnoticed for a year is a real amount for something that was frequently avoidable.
The lowest balance reached during the month is the third, and it is the one that is not printed. Recording it takes a moment and it is the number that shows whether the facility is still revolving, which no other line on the statement answers.
A second worked example
A business carries an $80,000 balance on a facility at an indicative 14% and has no schedule reducing it. It sets up a standing weekly transfer of $600 to the facility, treated as non-negotiable.
After one year the balance is roughly $49,000 and interest for the year was about $9,000 rather than the $11,200 it would have been on a static balance. After two years the balance is near $16,000 and the annual interest is under $5,000.
Nothing about the facility changed, no negotiation happened, and the business supplied the schedule the product lacks. The transfer can be reversed in a week where the money is genuinely needed, which is the advantage a revolving facility keeps over the term loan it is now behaving like.
Illustrative figures
Illustrative on stated assumptions and rounded. Not a quote or offer of credit.
Automating it
A sweep arrangement, where balances above a threshold in the trading account automatically reduce the facility, removes the repayment timing question entirely. Not every institution offers one on business accounts and where it exists it is worth asking about, because it captures the whole of the saving described on this page without any ongoing attention.
Where a sweep is not available, a scheduled transfer on the day after the business’s main receipt day achieves most of it. The transfer can be reversed if the money turns out to be needed, and the default position becomes repayment rather than accumulation.
Both are set up once. The reason they matter is that everything else on this page depends on somebody remembering, and the arrangements that survive a busy quarter are the ones that do not require anyone to.
A note on statements
A revolving facility statement contains four things worth a minute each month: the interest charge, any fees, the highest balance reached, and the lowest. The first two are what the facility cost, and the second two are what it did.
They commonly go unchecked, because the balance is visible in the accounting system and the statement feels redundant. What the accounting system does not show is the shape across the month, and the shape is what tells the business whether the facility is revolving.
The practical version is a single line added to a spreadsheet once a month: interest, fees, high, low. After a year that spreadsheet answers every question this site raises about a facility, and it takes about twelve minutes a year to maintain.
The cost, calculated
Reducing the days is the same as reducing the average balance, which is the input here. Indicative only, and not a quote or offer of credit.
Indicative interest cost
Weekly
$138/week
Indicative only. Not a quote or offer of credit. Actual rates, fees, and repayments depend on the business profile and the lender's decision.
Sending to Prospa
$55,000 drawn at 13.00% . Prospa will ask a few quick questions, then provide a firm quote and funding if eligible.
Redirecting…
References
Context for New Zealand interbank settlement and payment timing.
The regulator whose guidance covers fee disclosure and lender conduct.
Where a New Zealand lender’s registration can be confirmed.
The dispute resolution scheme relevant where a fee or a transaction is in dispute with a participating bank.
Backs the distinction between general information of this kind and regulated financial advice.
FAQ
Ordinarily daily on the closing balance, using a daily equivalent of the annual rate, accumulated through the month and charged at month end. The cost is therefore a function of amount and days rather than of the limit.
Yes. Interest accrues until the repayment reaches the facility, so a transfer that settles three days later than intended costs three days of interest on the full amount.
Applying receipts on the day they clear rather than weekly. It costs nothing, requires no lender agreement, and on a business cycling money regularly it saves more than most rate negotiations would.
Yes. Money drawn before it is needed sits in a trading account earning nothing while the facility charges. Timing the drawing to the payment removes those days.
On most revolving facilities it is applied to the facility itself, becoming part of the drawn balance and accruing interest from the following day. Keeping headroom to absorb it prevents the charge producing an excess.
Interbank settlement is not instantaneous and is subject to cut-off times. Where the facility and the trading account are at the same institution the transfer is ordinarily immediate, which is a practical argument for keeping them together.
A deposit showing in an account is not always available to apply against a facility. Where a receipt is subject to clearance, the days between credit and clearance are days the facility continues charging.
Either the excess is allowed with a fee, or the payment is dishonoured with a fee. The dishonour is worse commercially, because the party expecting the payment finds out, and both are avoided by keeping headroom.
Enough to absorb the month-end interest charge and any unexpected debit. Treating the last ten to fifteen percent of the limit as unavailable costs nothing and avoids both fees and the signal they send.
Commonly, and some agreements use a different basis. It changes the arithmetic slightly rather than the principle, and the agreement states which applies.
Largely, because every deposit reduces the balance immediately and every payment draws it. That mechanical efficiency is one of the overdraft’s genuine advantages over a separately held facility.
No. It explains mechanics in general terms. This site is not a lender, a broker or a registered financial adviser, and the terms of any particular facility are set out in its agreement.
Related
How a line of credit works
The full mechanism this guide sits inside.
Read onInterest and fees
Every charge, and what each is calculated on.
Read onBusiness overdraft
Where drawing and repaying happen automatically.
Read onManaging irregular income
Where repayment timing matters most.
Read onAll eight facilities
Every revolving arrangement compared in the same shape.
Read onDisclaimer
A revolving facility is a standing commitment serviced out of the same operating cash flow as everything else, and the interest and fees recur for as long as it is held. Modelling the weekly cost against the trading position before committing is what this site is built for. Borrowing at a level that stays comfortable through a quiet quarter, rather than only through a strong one, is widely regarded as the safer frame.
What this site is
A calculator and information tool. Not a lender, not a broker, not a registered financial adviser. Nothing here is personalised financial advice.
What the figures show
Modelled estimates based on the inputs shown. Not a quote. Not an offer of credit. Not a guarantee of approval, rate or fees.
What the lender decides
Final rates, fees, and approval are set by the lender after a CCCFA-appropriate assessment of the applicant's circumstances and credit decision.
Commercial disclosure
Lineofcredit.org.nz earns a commission from Prospa when a visitor applies through this site and their application is approved. The commission is paid by Prospa, not by the borrower, and it does not influence the rate Prospa offers. Full disclosure on the partner page.
Tax, GST, and accountant framing
Tax-treatment statements (GST claim timing, interest deductibility, depreciation rates) are general in nature and subject to the accountant's confirmation on the specific business position. For material amounts, professional advice from a registered financial adviser or chartered accountant is widely regarded as the safer frame.
