01
Interest, on the drawn balance
Calculated daily and charged monthly. The only charge that responds to how the facility is actually used, and ordinarily the largest for a business that draws regularly.
Guide
Approved once, used many times.
Almost every other business facility is a single event. A line of credit is a standing arrangement, and nearly everything that confuses people about it follows from that one difference.
MS
Matt Stiles Editor
Published 8 September 2026 Last reviewed 8 September 2026 Read time 13 min
The short version
Five lines that carry the whole idea.
- A limit is capacity, not money. Nothing is advanced at approval. The business borrows when it draws, and until then the facility is an entitlement rather than a debt.
- Interest runs on the balance, daily. Which means the cost is a function of how much and how long, and both are under the business’s control.
- Repayment restores capacity. The defining property. Repaying $40,000 makes $40,000 available again, with no application.
- There is no schedule, which cuts both ways. The flexibility is genuine and so is the absence of anything forcing the balance down.
- Indicative only. This is general information rather than advice, and every figure is illustrative.
The lifecycle
Four stages, from approval to review.
01
Approval, and what it actually is
A lender agrees a limit, a rate, a fee structure and a set of terms. No money moves. What the business has acquired is the right to borrow up to an amount, on stated conditions, which is a different thing from having borrowed it. Whether the lender is obliged to keep that right available for a period is the committed-or-uncommitted question, and it is worth asking explicitly because most small business facilities are uncommitted.
02
Drawing
The business transfers from the facility to its trading account, or in the case of an overdraft simply spends past zero. Interest begins accruing on the amount drawn from that day. Nothing has to be approved and no purpose has to be stated, which is the practical convenience of the arrangement and the reason it requires more self-discipline than a term facility.
03
Repaying
The business transfers back whenever it chooses. The balance falls, the daily interest calculation falls with it, and the headroom is restored immediately. There is no penalty for repaying and no requirement to repay by any particular date, unless the agreement contains a clean-down condition requiring the balance to reach zero at least once in a period.
04
Review
Periodically the lender reassesses the limit against the trading position and the usage pattern. The outcome can be an increase, no change, a reduction or a withdrawal. This is the stage businesses think about least and it is the one that determines whether the facility can be relied on, which is why the review terms deserve reading at the outset.
The interest calculation
Why the cost is not a rate multiplied by a limit.
Interest on a revolving facility is ordinarily calculated on the closing balance each day at a daily equivalent of the annual rate, accumulated through the month and charged at month end. A balance of $50,000 for ten days and nothing for the rest of the month produces ten days of interest on $50,000, not a month of it.
That makes the timing of repayments genuinely material. Applying a receipt on the day it clears rather than at the end of the month removes those days from the calculation, and on a business repaying and redrawing regularly the saving over a year is real rather than notional.
It also means the annual cost cannot be worked out from the rate and the limit. It comes from the average drawn balance across the period, which is why the calculator on this site asks for that rather than for the limit, and why a business holding a large facility it rarely uses pays far less than the headline suggests.
Calculated
Daily
Applied to
The closing balance
Charged
Monthly, ordinarily
Driven by
Amount and duration
The same limit, three usage patterns
What the cost actually depends on.
Illustrative on a $150,000 limit at an indicative 13% with a 0.5% line fee. Identical facilities, very different annual costs.
| Usage pattern | Average drawn | Interest | Plus line fee | Total |
|---|---|---|---|---|
| Held as a buffer, rarely drawn | $8,000 | ~$1,040 | $750 | ~$1,790 |
| Seasonal, drawn half the year | $65,000 | ~$8,450 | $750 | ~$9,200 |
| Continuously drawn near the limit | $135,000 | ~$17,550 | $750 | ~$18,300 |
Illustrative on stated assumptions and rounded. Not a quote or offer of credit.
Reading the table
The third row is a term loan wearing the wrong clothes.
A facility drawn continuously near its limit is not revolving. It is permanent borrowing carried at a revolving rate, and revolving rates are higher than term rates precisely because the lender expects the balance to move. A business in that position is paying a premium for flexibility it is not using.
The remedy is ordinarily to term out the permanent portion. Converting the part of the balance that never comes down into a scheduled facility at a lower rate, and leaving the limit for genuine fluctuation, reduces the cost and restores the headroom the facility was taken for.
Lenders generally welcome that conversation, because a hardened revolving balance is a position they are watching anyway. Raising it before a review is a considerably better sequence than having it raised at one.
What is charged
Four charges, and what each is calculated on.
A facility described by its rate alone is described by one of these. Comparing two offers requires all four.
02
Line fee, on the whole limit
Charged whether or not the facility is used, because the lender is holding capacity available. On a lightly used facility this is most of the annual cost.
03
Establishment and review fees
Once at the outset and periodically thereafter. Small individually and worth including in a comparison, particularly on a facility that will be reviewed annually.
04
Excess and dishonour fees
Charged where the limit is exceeded or a payment fails. Avoidable, and their real cost is the signal to the lender rather than the dollar amount.
The condition to look for
A clean-down requirement means the balance has to reach zero.
Some facilities carry a condition that the drawn balance must return to nil for a stated number of consecutive days at least once in each year. It exists to confirm the facility is genuinely revolving rather than funding a permanent position, and it is entirely reasonable from the lender’s side. It is also a real constraint on a business that has drifted into continuous use, and it is discovered late far more often than it is read at signing. Whether the agreement contains one is a single question with a one-word answer.
Against the alternative
A limit and a loan, side by side.
The structural differences matter more than the rate difference in almost every case.
| Feature | Line of credit | Term loan |
|---|---|---|
| Money advanced at approval | None | The full amount |
| Interest charged on | What is drawn | The whole amount |
| Repayment | At the business’s discretion | On a schedule |
| Available after repayment | Yes | No |
| Cost when the money is not needed | The line fee | Full interest |
| Anything forcing the balance down | Only a clean-down condition | The schedule |
| Can be withdrawn | Yes, at review | No, once drawn |
The last two rows are the trade in a sentence. A line gives flexibility and takes away certainty; a loan gives certainty and takes away flexibility. Neither is better in the abstract, and the need decides.
What a limit is not
Capacity is not capital.
An approved limit is frequently spoken about as though the business has the money, and it does not. It has permission to borrow, granted by a party that can reconsider. Treating a limit as part of the balance sheet, or as the answer to a solvency question, is the mistake that turns a useful facility into a false sense of security.
The distinction becomes real at exactly one moment, which is when the business needs the money most. A lender reviewing a facility for a business in difficulty is reviewing it under the conditions least favourable to keeping it in place, and the agreement will ordinarily allow a reduction.
That is not a reason to avoid a facility. It is a reason to hold one alongside a modest cash position rather than instead of one, and to keep the usage pattern healthy so a review has no reason to disturb it.
Running one well
Three habits that make the arrangement work.
01
Repay on receipt, not at month end
Interest accrues daily, so applying money the day it lands is free money. On a business cycling $80,000 through a facility several times a year, the difference between repaying on the day and repaying at month end is a genuine number rather than a rounding one.
02
Record the lowest balance each cycle
One number, taken after each substantial receipt or at the end of each trading cycle. Rising across several cycles, it is the earliest available signal that the facility has stopped revolving, and it appears long before any month feels difficult.
03
Keep headroom that is genuinely unavailable
Treating the last ten or fifteen percent of the limit as reserved rather than usable means an unexpected payment does not produce an excess. The cost of that discipline is nothing, and the cost of an excess is a fee and a signal.
Method
How this guide was written, and its limits.
The mechanics described here are those in general use across New Zealand business revolving facilities. Individual agreements differ, particularly on clean-down conditions, review triggers, fee structures and what a lender may do on a review, and the agreement itself governs any particular case.
No rates or fee levels are published here, because they vary by lender, by security, by amount and by applicant, and a figure quoted on a page that stays up for months would be describing a market rather than an offer.
Nothing here is financial advice. This site is not a lender, a broker or a registered financial adviser, and whether a revolving facility suits a particular business depends on facts a website cannot see.
Getting one
What an application involves, in order.
Generalised rather than specific to any lender. The sequence is broadly consistent even where the detail is not.
01
The limit, and the reason for it
The amount sought and the cash cycle it is sized against. A request that comes with the arithmetic is easier to grant and considerably easier to defend at a later review, because the business can point at the mechanism rather than at a preference.
02
Trading information
Bank statements first, and financial statements and management accounts at larger amounts. A lender assessing a revolving facility is reading how the account behaves across a year, so more months are better than fewer.
Documents commonly required
- Bank statements
- Financial statements where held
- Management accounts if current
03
Existing commitments and security
Every facility already running, with balances, repayments and any security registered. Where another lender holds a general security agreement, that position has to be resolved before a new facility can settle, and raising it early is far better than discovering it late.
Documents commonly required
- Existing facility schedule
- Register searches
04
Terms, and the parts worth reading
The limit, the rate and the fees are the parts everyone reads. The review cycle, whether the facility is committed, any clean-down condition and what the lender may do on a variation are the parts that determine how much the facility can be relied on.
No timings appear here. They vary by lender, by amount, by whether security is taken and by how complete the file is, and a page naming a number would be describing a promise nobody made.
When it goes wrong
Three failures specific to a facility with no schedule.
None of these can happen on a term loan, and all three are consequences of the flexibility a revolving facility provides.
The balance hardens
Drawing exceeds repayment slightly and consistently, and after two years the facility has a floor that never clears.
What happens:Permanent debt at revolving pricing, a weaker review, and no headroom left for the fluctuation the limit was taken for.
The limit is reduced
A review conducted while the trading position is weak results in a lower limit, on the terms in the agreement.
What happens:Funding withdrawn at the point it is most needed, which is inherent to an uncommitted facility rather than unusual.
The clean-down cannot be met
A condition requiring the balance to reach nil once a year meets a business whose balance has not been near nil for eighteen months.
What happens:A technical breach that surfaces the hardening problem abruptly, frequently at the least convenient moment.
All three trace to the same root, which is that nothing in the product reduces the balance. A business that supplies its own discipline, in the form of a recorded floor and a standing repayment, avoids all three.
Ending one
What closing a facility involves.
Repaying the balance does not close a revolving facility, because the limit remains available and the line fee continues. Closing it requires telling the lender, and where security is registered it requires that security to be discharged, which is a separate step that does not happen automatically.
A business that has moved to another provider and left the old facility open is paying a line fee for capacity it does not use, and leaving a registered security in place complicates the next financing for as long as it remains. Both are common and both are avoidable with one instruction.
Where the agreement has a minimum term or a notice period, closing early may carry a cost. That is worth reading before a facility is arranged rather than at the point of leaving, because it is the sort of term that is easy to accept at the start and expensive to discover at the end.
The cost, calculated
What an average drawn balance costs.
Because interest runs on the balance rather than the limit, the average drawn figure is the input that matters. Indicative only, and not a quote or offer of credit.
Indicative interest cost
Weekly
$163/week
$704 /month $8,450 a year while drawn
$150,000
$5,000 $500,000
$65,000
Nothing drawn Fully drawn
13.00% p.a.
8% (secured) 30% (unsecured)
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
Your $150,000 scenario
$65,000 drawn at 13.00% . Prospa will ask a few quick questions, then provide a firm quote and funding if eligible.
Redirecting…
References
Sources
- Reserve Bank of New Zealand, statistics
Context for New Zealand business lending rates and why indicative bands move.
- Commerce Commission
The regulator whose guidance covers lender conduct, disclosure and fees.
- Personal Property Securities Register
Backs the description of the general security interest a facility ordinarily registers.
- Financial Service Providers Register
Where a New Zealand lender’s registration can be confirmed before an application is made.
- Financial Markets Authority, financial advice
Backs the distinction between general information of this kind and regulated financial advice.
FAQ
Questions, answered
What is a line of credit?
An approved limit a business can draw against and repay at will, with interest charged only on the balance outstanding. Repaying restores the capacity, so the facility is available again without a new application.
Is money advanced when a limit is approved?
No. Approval grants the right to borrow up to an amount on stated conditions. Until the business draws, there is no balance and no interest, only the line fee.
How is interest calculated?
Ordinarily daily on the closing balance, accumulated through the month and charged at month end. A balance held for ten days produces ten days of interest rather than a month of it.
Does repaying early cost anything?
Ordinarily not. There is no schedule to break and no early repayment penalty on a typical revolving facility, and repaying promptly reduces the interest calculation from that day.
What is a clean-down condition?
A requirement that the drawn balance return to nil for a stated number of consecutive days at least once a year. It exists to confirm the facility is genuinely revolving, and it is discovered late more often than it is read at signing.
What is a line fee?
A charge on the approved limit, payable whether or not the facility is used, because the lender is holding capacity available. On a lightly used facility it is most of the annual cost.
Can a lender withdraw the limit?
On the terms in the agreement, yes, and most small business facilities are uncommitted. Asking whether a facility is committed or uncommitted is the single most useful question about how much weight to put on it.
How is the annual cost worked out?
From the average drawn balance across the period rather than from the limit. That is why a large facility used rarely costs far less than its headline rate suggests, and a small one drawn continuously costs more than expected.
What happens if the limit is exceeded?
An excess fee ordinarily applies and payments may be dishonoured. The direct cost is small and the signal to the lender is not, which is why treating the last portion of the limit as unavailable is worthwhile.
What does a lender look at during a review?
The trading position and the usage pattern, particularly whether the balance moves. A facility used and cleared through several cycles reviews considerably better than one that has sat near its limit.
Should a business treat a limit as capital?
No. A limit is permission to borrow, granted by a party that can reconsider, and the reconsideration is most likely when the business is under pressure. Holding a modest cash position alongside a facility is what covers that.
Is this guide financial advice?
No. It explains a mechanism in general terms. This site is not a lender, a broker or a registered financial adviser, and whether a facility suits a particular business depends on facts a website cannot see.
Related
Keep reading
Business line of credit
The facility this guide describes.
Read onDrawdown and repayment mechanics
The day-to-day detail underneath it.
Read onInterest and fees
Every charge, and what each is calculated on.
Read onAgainst a term loan
The comparison that decides most cases.
Read onAll eight facilities
Every revolving arrangement compared in the same shape.
Read on