How is interest calculated on a revolving credit facility?
One of the most common questions from business owners evaluating revolving credit is: "How does the interest actually work?" It is a fair question, and the answer is one of the most compelling reasons to consider a revolving facility over a fixed-term loan.
This article explains exactly how interest is calculated on a revolving credit facility, walks through worked examples with numbers, and compares the real cost against a standard business term loan.
The core principle: you pay interest only on what you draw
With a term loan, interest is calculated on the full loan amount from the day the money lands in your account, whether you use all of it or not. If you borrow £100,000 and only spend £60,000 in the first three months, you are still paying interest on £100,000 throughout.
A revolving credit facility works differently. Interest accrues only on the outstanding drawn balance at any given time. If your facility limit is £100,000 but you have only drawn £30,000, you pay interest on £30,000.
This distinction has a real impact on the total cost of finance over time, particularly for businesses whose capital needs fluctuate month to month.
How interest accrues: day-by-day calculation
Interest on a revolving credit facility is typically calculated on a daily basis, applied to the balance outstanding on each day. The daily rate is derived from the annual or monthly rate agreed on your facility.
The basic formula
Daily interest charge = Outstanding balance × Daily interest rate
Daily interest rate = Annual rate ÷ 365
Example:
- Facility limit: £100,000
- Outstanding balance: £40,000
- Annual rate: 18% (illustrative — actual rates vary and depend on your circumstances)
- Daily interest rate: 18% ÷ 365 = 0.0493% per day
Daily interest charge = £40,000 × 0.0493% = £19.73 per day
Over a 30-day period at this balance, total interest = £19.73 × 30 = £591.78
How the interest calculation changes as you draw and repay
Because interest is tied to your outstanding balance, the cost of your facility responds in real time to your draw-down and repayment activity. Draw more and your daily interest cost rises. Repay and it falls immediately.
Worked example: variable balance over 30 days
Using the same £100,000 facility and 18% annual rate (illustrative):
| Day | Event | Outstanding Balance | Daily Interest |
|---|---|---|---|
| 1 | Start of period | £0 | £0.00 |
| 1 | Draw down £35,000 | £35,000 | £17.26 |
| 8 | Draw down additional £15,000 | £50,000 | £24.66 |
| 15 | Repay £25,000 | £25,000 | £12.33 |
| 22 | Draw down £20,000 | £45,000 | £22.19 |
| 30 | End of period | £45,000 | £22.19 |
Approximate total interest for the 30-day period:
| Days | Balance | Daily Rate | Sub-total |
|---|---|---|---|
| Days 1–7 (7 days) | £35,000 | 0.0493% | £120.80 |
| Days 8–14 (7 days) | £50,000 | 0.0493% | £172.57 |
| Days 15–21 (7 days) | £25,000 | 0.0493% | £86.28 |
| Days 22–30 (9 days) | £45,000 | 0.0493% | £199.47 |
| Total | £579.12 |
Compare this to a term loan of £50,000 at the same annual rate (18%) over 30 days, where interest accrues on the full balance regardless of usage:
£50,000 × 0.0493% × 30 days = £739.73
By drawing and repaying dynamically, the revolving facility delivered the same underlying capital access at a much lower interest cost.
Facility fees vs. interest: understanding the full cost
Some revolving credit facilities include a facility fee, a charge for having the credit line available, separate from the interest you pay on drawn amounts. It is important to understand both components when evaluating the true cost of your facility.
Facility fee: A periodic charge (monthly or annual) for access to the credit limit, regardless of whether you draw. This compensates the lender for committing capital to you.
Draw-down interest: The interest charged on any outstanding balance, as described above.
Not all revolving credit facilities have both components, and the relative balance between them matters depending on how frequently you draw. If you use the facility constantly, a higher draw-down rate with no facility fee may cost more overall. If you hold the facility in reserve and draw infrequently, a lower draw-down rate with a small facility fee might be cheaper overall.
When evaluating any revolving credit product, ask: - Is there a facility fee, and how is it structured? - What is the interest rate on drawn balances? - Are there any other charges (arrangement fees, early repayment charges)?
Juice Flex is designed to be transparent on cost: no early repayment penalties, and a clear rate structure so you can model the cost against your cash flow before you draw.
Revolving credit vs. term loan: a side-by-side interest comparison
To make this concrete, here is a comparison of two businesses both needing access to up to £80,000 over a six-month period. One uses a term loan, the other a revolving credit facility.
Business A: term loan, £80,000 over 6 months
- Borrows £80,000 on day one
- Fixed monthly repayments over 6 months
- Actual usage peaks at £80,000 in month one but falls as needs are met. Some of this capital sits idle.
- Interest is charged on the full £80,000 balance throughout (reducing slightly each month as principal is repaid)
- Approximate total interest at 18% annual rate: ~£3,600 (varying by repayment schedule)
Business B: revolving credit facility, £80,000 limit over 6 months
- Draws down only what is needed, when it is needed
- Average outstanding balance over the 6 months: £35,000 (reflecting draw-down and repayment cycles)
- Interest charged only on the average outstanding balance
- Approximate total interest at 18% annual rate on £35,000 average balance over 6 months: ~£1,575
The revolving facility in this scenario costs approximately 56% less in interest, purely because interest accrues only on the drawn balance, not the full limit.
(Both examples are illustrative. Actual rates depend on your business circumstances and the specific terms of your facility.)
What affects your interest rate?
The rate offered on a revolving credit facility will vary depending on several factors:
- Business financial health: Revenue, profitability, and cash flow history
- Time in business: Lenders typically require a minimum trading period
- Credit history: Both the business and the director
- Facility size: Larger facilities may carry different rates than smaller ones
- Security: Whether the facility is secured or unsecured
Juice Flex is an unsecured revolving credit facility. You do not need to put up property or assets as collateral. Eligibility and rates are subject to status and lending criteria.
How to think about interest when planning draw-downs
Because interest cost is directly tied to your drawn balance, you have more control over the cost of a revolving facility than you do with a term loan. A few practical principles:
Repay early when cash is available. Every pound you repay reduces your outstanding balance and immediately reduces your daily interest charge. Unlike term loans, there are no early repayment penalties with Juice Flex, so repaying ahead of schedule always saves money.
Draw only what you need. The facility is there when you need it. You do not have to use it fully just because it is available. Drawing £20,000 when you need £20,000 is always cheaper than drawing £50,000 and letting £30,000 sit idle.
Match draw-downs to revenue cycles. If you know a customer payment is arriving in three weeks, drawing now and repaying in three weeks is a short, predictable interest period. Align draw-down timing with your expected repayment timeline to minimise cost.
Use the facility as a bridge, not a baseline. Revolving credit is most cost-effective when used to bridge specific gaps, not as a permanent overdraft running at maximum. Keep your average outstanding balance as low as your business needs allow.
Apply for Juice Flex
Juice Flex revolving credit facilities run from £25,000 to £1,000,000. Apply in minutes at app.getmejuice.com/sign-up — no impact to your credit score to check eligibility.
Want to understand the mechanics further? Read our full guide to how draw-down and repayment works or see a complete worked example for a UK SME.
For more on this topic, explore our How Does Revolving Credit Work resource hub.
Subject to status and lending criteria. Juice Flex is provided by Juice Ventures Limited, registered with the Financial Conduct Authority. Interest rates quoted in this article are illustrative only and are not representative of rates available on any specific product. Actual rates depend on individual circumstances.