How business overdraft interest is calculated — and what fees actually add up

Updated May 2026.

The bank quotes you 8% and you assume 8% is what you're paying. That's almost never the right number. On a real business overdraft, you pay daily interest on whatever you drew, plus a commitment fee on whatever you didn't draw, plus a one-time arrangement fee at signing, plus possibly a few other things depending on the structure. The headline rate is the biggest piece but it's not the whole picture, and the gap between “8% quoted” and “10% effective” is normal, not a mistake.

This guide walks through each piece of the cost — the math, the fees, and where they end up in the total number — using one concrete scenario you can verify on the business overdraft cost calculator. This is the borrower-side cost page in the business-credit cluster: what you pay.

The bank-side view of the same line — what the bank earns — lives on the business overdraft income calculator, with the broader bank-economics framing on net interest income on a credit line. If the question is really whether to use an overdraft at all instead of a fixed-term loan, the overdraft vs. term loan vs. credit card calculator runs the side-by-side cost view.

Once you can read the cost, the negotiation memo covers what is actually movable on the term sheet.

The interest piece, in dollars

Take the first three terms from the sidebar — drawn balance, rate, and days over the day-count base — and put real numbers on them. Interest accrues per day, so the dollar figure scales with how long the balance is outstanding.

On a $100,000 draw at 8% for 30 days under Actual/360: $100,000 × 0.08 × 30 ÷ 360 = $666.67 in interest. Same draw for 90 days: $2,000. Same draw for a full calendar year (365 days): $8,111 — slightly more than the headline 8% would suggest, because of the day-count quirk covered in the next section.

One thing this piece doesn't care about: how big the facility is. You only pay interest on what you actually drew. A $500K limit with $100K drawn pays interest on the $100K, not the $500K. The unused $400K shows up separately as the commitment fee, which the next-but-one section covers.

Actual/360 vs Actual/365 — the day-count quirk

US commercial loans usually use Actual/360. The bank divides the annual rate by 360 to get the daily rate. The borrower lives in a 365-day year. Result: an 8% Actual/360 rate produces about 8.11% in actual interest over a calendar year. The math is simple — 365 ÷ 360 = 1.0139, so any Actual/360 rate is about 1.4% higher than it looks when you measure it across a real year.

On the same $250,000 draw at 8% for 90 days, the day-count basis changes the interest charge by about $68:

The difference is small on a single draw and adds up over the year on a heavily-used line. It's also one of the things you can't really negotiate — the basis is set by the type of facility and the lender's standard contract. But you should know which one you're on, because it's the difference between an 8% rate that earns 8% and an 8% rate that earns 8.11%. Read the loan agreement; it's usually one short clause.

The commitment fee — paying for capacity you didn't use

When the bank gives you a $500K line and you only draw $250K, there's $250K of unused capacity sitting there. The bank had to set capital aside for that capacity (regulators require it), and the commitment fee is what they charge for keeping it available. Typical rates: 0.25%–0.75% per year on the undrawn portion.

The math is identical to interest, just on the unused half:

commitment fee = undrawn portion × commitment rate × days ÷ day-count base

On the $250K draw of a $500K line, at 0.50% commitment over 90 days Actual/360: $250,000 × 0.50% × 90 ÷ 360 = $312.50. Small money. But it's real, and it shows up regardless of whether you draw more or less. If you don't need a $500K line and you're only ever going to draw $250K, you'd be better off negotiating a smaller line and paying no commitment fee on the missing capacity.

One trap: some facilities are structured as facility fee instead of commitment fee. The fee rate is the same, but it accrues on the fulllimit, not the undrawn portion. So even when you draw the whole line, you still pay the fee on the full $500K, not on $0 of undrawn. Read the agreement. The language is “commitment fee on undrawn” (most common) vs “facility fee on the limit” (syndicated structure, more common at larger banks).

Arrangement fee — the upfront tax

Most business overdraft facilities charge a one-time arrangement fee at signing — the bank's cost for underwriting, structuring, and committing the line. Typical range: 0.25%–1.50% of the limit, paid once. On a $500K line at 0.20%, that's $1,000.

The arrangement fee is small in dollars but big in effective APR on short-term draws, because you're spreading a one-time fee over only a few months. A $1,000 fee on a 90-day $250K draw is $1,000 ÷ $250,000 ÷ (90/360) × 100 = 1.60% added to the effective APR. On a year-long draw (365 days), the same fee is only about 0.39%. Same dollar amount, very different APR impact.

One implication: if you have a choice between a higher arrangement fee and a higher rate, the arrangement fee tilts toward better for long-duration draws and worse for short-duration draws. The longer you hold the balance, the more the rate matters relative to the upfront fee.

A worked example you can verify

Take a $500,000 business overdraft. You draw $250,000 of it for 90 days. The lender charges 8% on drawn money (Actual/360), 0.50% commitment fee on the undrawn portion, and a $1,000 arrangement fee at signing.

The lending rate was 8%. The effective APR — total cost divided by what you actually borrowed, annualized — is 10.10%. That's a 2.10 percentage-point bump from headline rate to all-in cost, and almost all of it is the arrangement fee compressed into a 90-day draw. If you held the same balance for a year, the effective APR would drop closer to the lending rate, because the arrangement fee gets spread over more days.

You can verify these numbers on the cost calculator — punch in the same inputs and the totals match.

What to look for on a quote

Banks lead with the rate. The fees are in the fine print or the term sheet, and they're where the surprises live. Four questions to ask before signing:

  1. What's the day-count basis? If they say Actual/360 (typical), assume the rate is about 1.4% higher in real interest than it looks. If they say Actual/365, what you see is what you pay.
  2. Is the commitment fee on the undrawn portion or the full limit? Undrawn is standard and cheaper. Full-limit (facility fee) is common at larger banks but means you pay even when fully drawn.
  3. What's the arrangement fee, and is it amortized over the term? If it's a flat upfront fee on a short-term draw, it dominates the all-in cost. If it's a multi-year line, the fee per year is much smaller.
  4. Are there other fees I'm not seeing?Drawdown fees ($50–500 per draw), annual audit fees on asset-based loans, collateral-monitoring fees, renewal fees for multi-year lines. Most don't apply to a vanilla overdraft, but the bigger and more structured the facility, the more line items show up.

Frequently asked questions

Why is my effective APR higher than the quoted lending rate?

Fees. The lending rate (e.g., 8%) is interest only. The effective APR adds the arrangement fee, the commitment fee on the undrawn portion, and any other one-time costs, then divides by what you actually borrowed. On a short-term draw, even a small one-time fee turns into a meaningful APR bump because you're spreading the fee over a few months instead of years.

What is the commitment fee and why am I paying it on money I didn't borrow?

The commitment fee is the bank's charge for keeping the line available to you, even when you don't draw on it. Typical rates are 0.25%–0.75% per year on the undrawn portion. The bank has to set capital aside for the unused portion of your line, and the commitment fee compensates for that. It's small money but it's there in the contract — confirm whether yours is structured as 'undrawn' (most common) or 'full-limit' (you pay on the whole line regardless of draw).

Actual/360 vs Actual/365 — does it matter?

About 1.4% on annualized interest. Actual/360 means the bank divides the annual rate by 360 to get the daily rate, but you actually have 365 days in the year. So an 8% Actual/360 facility produces about 8.11% in interest over a calendar year. Most US commercial lines use Actual/360. UK and US consumer credit usually use Actual/365. Read the agreement; the basis is in there.

If I only draw for 30 days, am I really paying the full lending rate?

You're paying the daily equivalent of it. The lending rate is annual; daily interest is rate ÷ day-count base × days held. On a $100K draw at 8% Actual/360 for 30 days, that's $100,000 × 8% × 30/360 = $666.67 in interest. Annualized it's still 8%. The shorter the draw, the smaller the dollar number — but the rate is the rate.

How do I lower the all-in cost?

Three levers. Negotiate a lower margin over benchmark (the spread the bank charges) — the rate piece is the biggest factor. Cut the arrangement fee or amortize it across a longer period (a one-time $1,000 fee on a 90-day draw is much higher APR than the same fee on a year-long draw). Don't carry undrawn capacity you won't use — the commitment fee is small but it's wasted money on a line you don't need.

Are these calculations the same for a personal line of credit?

The math is the same; the rates and fees are usually different. Personal lines typically use Actual/365 (TILA convention) and rarely have arrangement fees in the four-figure range. Business lines use Actual/360 by default and the fees can stack — arrangement, commitment, drawdown, audit, monitoring on asset-based loans. Read the disclosure.

Sources and methodology

The math is simple-interest accrual on a per-day basis, with day-count conventions from US commercial-lending standards (see Federal Reserve H.15 Selected Interest Rates for benchmark-rate context). Industry framing on commitment fees and arrangement fees comes from the OCC Comptroller's Handbook on Loan Portfolio Management. All worked-example numbers come directly from the cost calculator and are verifiable by re-running the same inputs there.

What to do next

  1. Run your draw on the cost calculator

    Plug in your facility limit, draw amount, days held, and the fees from your quote. The all-in cost and effective APR show up directly.

  2. Read the spread vs yield bridge guide

    If you want to understand what the bank is earning on the same facility, this explains the lender side in the same plain terms.

  3. Compare to a term loan with the effective APR calculator

    If you're weighing the overdraft against a term loan, this lets you put both on the same all-in basis.

Ask a PayoffMath question

Got a follow-up about the math or how the numbers play out on your specific loan? Ask here. Not financial advice — for regulated decisions (taxes, securities, mortgage approval) talk to a licensed professional.

Hi, I'm the PayoffMath assistant. I answer questions about loan-payoff math, how the calculators on this site work, and how to read the numbers — I'm not a financial advisor and I can't give you personal financial advice. For regulated decisions (taxes, securities, mortgage approval) talk to a licensed professional.