Business line of credit rates: how to compare two offers by what you will really use
A credit line has no single price. What it costs you depends on the rate, the fees around it, and how much of the limit you actually draw. This guide breaks the price into its parts and runs two illustrative offers through three levels of use.
By Clario Capital Team · Published
The short version
Two credit line offers with the same limit can rank in opposite order depending on your habits. The one with the lower rate can be the more expensive choice if you rarely draw on it, because fixed fees and standby charges keep running while interest does not. So before you compare rates, you need a realistic guess at your average drawn balance. The rest of this guide shows how to make that guess and what to do with it.
What a credit line price is made of
The Competition Bureau describes a line of credit as a short-term, flexible loan for working capital, and notes it is also called a demand loan because the lender can ask for full repayment at any time. Within that structure, the price usually has several moving parts:
Base rate
Usually the lender’s own prime rate. It is variable, so it can move during the life of the line, and every lender sets its own.
Spread
The amount added on top, written as “prime plus 2” or similar. This is the part that reflects how the lender sees your file, and it is where offers differ most.
Interest on the drawn balance
You pay interest only on what you have actually used, usually calculated on the daily balance. An unused line costs no interest.
Standby or unused fee
A small yearly percentage charged on the part of the limit you are not using. It is the lender’s price for keeping money ready for you.
Annual or renewal fee
A flat charge, often taken each year when the lender reviews and renews the line, whether you used it or not.
Draw or transfer fee
Some lines charge each time you move money from the line to your account. Harmless if you draw twice a year, costly if you draw every week.
Not every offer has every part, and some lenders use different names. Ask for a written list of every fee that can apply, including setup, renewal, draw, standby and any charge for going over the limit or missing a payment.
Why the headline rate is only half the story
With a lump-sum loan you borrow the whole amount on day one, so the interest rate does most of the work in setting the cost. Our guide to business loan interest rates covers how to turn those quotes into one annual number. A credit line is different. Interest only runs on what you draw, but the fees run on the limit or on the calendar. That means the true cost per dollar used falls as you use more of the line, and rises sharply when the line sits idle.
This matters in Canada in particular. The Competition Bureau’s January 2026 market study notice cites the 2024 OECD Scoreboard, which found Canadian small and medium-sized businesses paid 1.64 percentage points more in interest than large businesses in 2021 and 2.10 points more in 2022, a wider gap than the OECD averages. A smaller business has good reason to check every part of the price, not just the spread.
Worked example: two illustrative offers on a $100,000 limit
Everything in this section is illustrative. The numbers are invented to show the arithmetic and are not a quote, a typical rate or a prediction of what any lender will offer. For the sums we assume the lender’s prime rate is 6%. That is a placeholder, not today’s prime.
| Illustrative term | Offer A | Offer B |
|---|---|---|
| Limit | $100,000 | $100,000 |
| Rate | Prime plus 3 (9% in this example) | Prime plus 5 (11% in this example) |
| Standby fee | 0.5% a year on the unused limit | None |
| Annual renewal fee | $1,000 | $250 |
Offer A looks cheaper at a glance because its spread is two points lower. Now estimate one year of cost at three average drawn balances. To keep the arithmetic readable, interest is shown as simple yearly interest on the average balance. Real lenders usually charge on the daily balance and add interest monthly, so the actual figures would differ slightly.
| Average drawn | A interest | A standby | A renewal | A total | B interest | B renewal | B total |
|---|---|---|---|---|---|---|---|
| $10,000 | $900 | $450 | $1,000 | $2,350 | $1,100 | $250 | $1,350 |
| $40,000 | $3,600 | $300 | $1,000 | $4,900 | $4,400 | $250 | $4,650 |
| $80,000 | $7,200 | $100 | $1,000 | $8,300 | $8,800 | $250 | $9,050 |
What the illustrative table shows:
- Light use ($10,000 on average): Offer B costs about $1,350 against about $2,350 for Offer A. On the money actually used, that is roughly 13.5% versus 23.5% a year, even though A has the lower rate.
- Moderate use ($40,000 on average): B is still ahead, about $4,650 against $4,900, but the gap has almost closed.
- Heavy use ($80,000 on average): A wins, about $8,300 against $9,050, because its lower spread now applies to a large balance and the standby fee has shrunk to $100.
In this example the two offers cost the same at an average balance of $50,000, about $5,750 each. Below that, Offer B is cheaper. Above it, Offer A is. You can find the crossover for any two offers the same way. Offer A starts $1,250 behind, because its idle cost is $1,500 against $250 for Offer B. Each dollar you draw then narrows the gap by 2.5 cents a year: two points of lower spread, plus the half point of standby fee that stops on money in use. Divide $1,250 by 0.025 and you get the $50,000 crossover.
Also notice the cost of a line you never touch. Left completely idle for a year, Offer A would still cost $1,500 in standby and renewal fees, and Offer B $250. If you want a line mainly as a safety net, that idle cost is the number to compare first.
Two things that can change the ranking
Draw fees
Suppose, as an illustration, Offer B also charged 1% on every draw. Drawing $5,000 ten times in a year would add $500, which on moderate use would flip the ranking back toward Offer A. If you expect frequent small draws, count them.
Prime moving
Both illustrative offers float with prime, so a rate rise hits them equally on the drawn balance. If prime went up by one point, an average balance of $40,000 would cost about $400 more a year on either offer. A variable line does not protect you from rate changes. What you can compare is the spread, so ask each lender in writing whether it is fixed for the life of the line or can change at renewal.
How to estimate your own usage
- Look back first. Pull the last 12 months of business bank statements and mark the months where you were short of cash, and by how much.
- Estimate the average balance, not the peak. A line drawn to its limit for one month and empty for eleven has a low average. Interest follows the average; standby fees follow the unused part.
- Count the draws. If the offer has a draw fee, the number of times you will draw matters as much as the amount.
- Run three cases. Light, expected and heavy use, as in the table above. If one offer wins in all three, the choice is easy. If not, pick the one that wins at the level you are most likely to hit.
- Check the limit you need. A larger limit than you will use can raise standby fees without adding value.
Questions to put to every lender in writing
- Which prime rate is the line tied to, and how quickly do rate changes apply?
- Is the spread fixed for the life of the line, or can it change at each renewal review?
- How is interest calculated: daily balance, monthly compounding, or something else?
- What fees can apply, and are they charged on the limit, the unused amount, each draw, or once a year?
- What is the minimum monthly payment, and does it include any principal?
- Under what conditions can the lender reduce the limit or demand repayment?
- What security or personal guarantee is required?
Fees are not a side issue. Section 347 of the Criminal Code defines a criminal rate using an annual rate of interest that counts fees, commissions, penalties and similar charges as part of interest. That is a useful reminder of the principle behind this guide: the honest price of credit includes the fees, not just the quoted rate. For deciding whether a credit line is the right product at all, see line of credit vs term loan, and for a scorecard that works across product types, see how to compare business loan offers.
Where Clario Capital fits
Clario Capital is not a lender. We do not set rates, approve applications or decide terms; each lending partner sets its own rate based on your business’s credit, performance and the terms of the deal. What we do is share one application with our network of lending partners so you can compare competing offers. Offers from the network cover business lines of credit, working capital, term loans, revenue-based financing and equipment financing, though not every business will see every product. A Clario funding advisor can walk you through any offers that come back so you can run them through the kind of usage test shown above.
Our service is free. Individual lenders may have their own fees, which are disclosed, and those belong in your cost comparison. There is no obligation to accept any offer. When you are ready, start one application, or read how Clario works first.
Sources
This guide is general information for Canadian business owners, not financial, legal or tax advice. Clario Capital is not a lender. Funding approval, rates and terms are not guaranteed and are set solely by our lending partners. Any examples are illustrative. The actual lender written terms govern any offer you receive.