What this calculator does
You have a working-capital need — payroll bridge, inventory buy, equipment down payment, customer-payment timing gap. Three options usually on the table:
- Draw on an existing overdraft / line of credit. Lower interest rate, small arrangement fee, commitment fee on the undrawn portion. Best for moderate-length draws.
- Take a term loan. Higher rate but longer term, origination fee at signing, possible prepayment penalty. Better for longer holds where the rate matters more than the upfront fee.
- Charge it on a business credit card. Two very different cost shapes depending on transaction type. Genuine purchases (paid in full from the prior statement) get a 21–25 day grace period and zero fees. Cash advances — convenience checks, ATM advances, balance transfers, and most non-purchase uses — charge interest from day 1 plus a 3–5% advance fee. Working-capital draws are almost always the second case.
Each option has a different cost shape — fixed setup fees that dominate short draws, daily interest that dominates long ones. The cheapest option flips depending on how long you actually hold the balance. The calculator computes total cost for each option at your specific holding period, then runs a sensitivity across common day thresholds (7 / 14 / 30 / 60 / 90 / 180 / 365) so you can see where the answer changes.
The math
Each option uses simple-interest accrual over the holding period — the right model for short-horizon working-capital draws on all three product types. One-time fees are added on top.
- Overdraft:
amount × OD rate × days / 360 + arrangement + commitment fee on undrawn(Actual/360 day-count is the US commercial default). - Term loan:
amount × rate × days / 365 + origination + (prepayment penalty if early payoff)(Actual/365 is the TILA convention for amortizing loans; simple-interest approximation is conservative for the borrower on short holds). - Credit card (purchase, in grace):
amount × APR × (days − grace) / 365with no fees. Only valid for actual vendor purchases when the prior statement balance was paid in full. - Credit card (cash advance):
amount × APR × days / 365 + max(amount × advance fee %, flat minimum). Grace doesn't apply; interest accrues from day 1. The realistic default for working-capital draws.
Effective APR for each option: total cost / amount × 365 / days × 100— same annualization across all three so they're directly comparable.
When each option tends to win
The cheapest option depends on your specific rates and fees, but there are predictable patterns:
- Card wins ONLY on actual purchases inside grace.If the draw is a real vendor purchase and you'll clear the statement balance in full before the next due date, interest is zero. Nothing else competes with zero. This isn't the normal working-capital scenario though — most cash needs become cash advances on the card, which lose to the overdraft on almost any holding period.
- Overdraft wins on weeks-to-months draws. Lower rate than a card, fewer fees than a term loan. The most common answer for genuine working-capital needs that resolve in a quarter or less.
- Term loan wins on multi-month to multi-year holds. The lower amortizing rate beats the overdraft rate over enough days to overcome the origination fee. Term loans also lock the rate, which matters in a rising-rate environment.
- Mixed strategy can win on irregular needs.If you'll need money for short bursts repeatedly, an overdraft you keep open and draw against is cheaper than spinning up a new term loan or carrying card debt each cycle.
What this calculator deliberately doesn't handle
- Tax deductibility. Business interest is generally deductible — multiply each total by
(1 − marginal tax rate)for an after-tax view. The ranking usually doesn't change because the deduction applies to all three. - Reward-card cashback or points.A 1.5% cashback card on a 14-day grace draw is effectively −1.5% APR. We don't model rewards because the value depends on how you redeem them.
- Approval probability + speed.A term loan you can't close in time isn't actually an option. Cards are typically same-day; overdrafts are usually same-week if you have a banking relationship; term loans run 2–8 weeks. If you need money this week, the math says “term loan” and reality says “overdraft or card.”
- Covenant + collateral cost. Term loans and larger overdrafts often require personal guarantees, collateral pledges, financial reporting, or covenants that constrain how you run the business. Cards rarely do. The cost calculator sees dollars; the covenant cost is invisible to it but real.
Frequently asked questions
Which option wins on most short-term draws?
It depends on the rates, fees, and how long you'll hold the balance. For working-capital cash needs, the card is usually the worst option — most working-capital uses are cash advances (convenience checks, ATM advances, balance transfers), which charge interest from day 1 plus a 3–5% fee. The grace-period 'free money' case only applies to actual purchases when you paid your prior statement balance in full. For weeks-to-months draws, the overdraft typically wins because its interest rate beats card cash-advance APRs and the only fee is a smaller arrangement charge. For multi-month or year-long needs, term loans often win because the lower amortizing rate beats the OD rate by enough to overcome the origination fee. The sensitivity table on the calculator shows the flip points for your specific inputs.
Why is the term loan computed with simple interest instead of full amortization?
On a short-term draw against a multi-year term loan that you intend to pay off early, the bulk of the early period is interest on a near-full principal balance. Simple interest (principal × rate × days / 365) is a clean approximation for those first few months of an amortizing loan and slightly overstates the true interest — a conservative bias for the borrower. For loans you'll hold to term, use the dedicated effective APR calculator instead; it does full amortization with prepayment penalty and tax modeling.
When would I use a business credit card for a working-capital draw?
Be honest about the transaction type. If you're using the card to pay an actual vendor invoice and you'll clear the statement balance in full before the next due date, the purchase qualifies for the grace period — interest is zero, fees are zero. Set the calculator to 'Purchase' for that case. Most working-capital uses, however, are cash advances disguised as 'I'll just put it on the card': convenience checks, ATM advances, balance transfers from another card, payments to vendors who code the transaction as cash. All of those charge interest from day 1 and a 3–5% advance fee on top. Set the calculator to 'Cash advance' for that case. Outside the genuine purchase scenario, the card usually loses to an overdraft.
What's a typical origination fee on a business term loan?
Bank-originated SBA 7(a) loans: 0%–3.5%. Conventional bank term loans: 0.5%–2%. Online / fintech term loans (BlueVine, Funding Circle, OnDeck): 2.5%–5%. SBA 504: 0% on the SBA portion plus origination on the bank portion. Always read the term sheet — origination fees can be expressed as percent of principal, flat dollar amount, or stacked with closing costs that aren't called 'origination' but function the same way.
Should I include the prepayment penalty even if my loan agreement doesn't mention one?
Most national bank-originated business term loans don't carry prepayment penalties on amounts under $250K, but smaller community banks, credit unions, and some SBA-backed loans do. SBA 504 explicitly does for the first 10 years of the SBA portion. Set the field to 0 only if your specific loan disclosure says no prepayment penalty applies. If unsure, set 1-2% as a conservative placeholder; it'll show up in the comparison if it changes the answer.
Why doesn't the calculator factor in tax deductibility?
Business interest is generally tax-deductible on Schedule C (sole prop) or Form 1120 / 1065 (entity). The deduction reduces your effective cost by your marginal tax rate. Since the deduction usually applies similarly across all three options here, it doesn't change the ranking — it just shifts every option's cost by the same percentage. If you want the after-tax cost number, use the effective APR calculator on a single option, or multiply the totals here by (1 − marginal tax rate).
Sources and methodology
Day-count conventions (Actual/360 for US commercial, Actual/365 for TILA-disclosed amortizing loans) follow Federal Reserve H.15 Selected Interest Rates conventions. Industry framing on commitment fee accrual and facility-fee structures comes from the OCC Comptroller's Handbook on Loan Portfolio Management. Worked numbers come from the engine — re-runnable with your own inputs.
What to do next
- Open the overdraft cost calculator
If overdraft is the winner, model your specific draw with full fee detail (commitment, unused-line, day-count basis).
- Open the effective APR calculator
If term loan is the winner, the effective APR calc handles full amortization with origination, prepay, and tax modeling.
- Read how overdraft interest is calculated
Understand the daily-accrual formula, day-count basis, and where each fee enters the all-in cost.