Do you pay a line fee if the overdraft is not used?

Yes, in the usual form. The fee is charged on the limit, so it is payable for as long as the limit is in place, even with a nil balance all month. Interest is the part that depends on use. A business that holds an overdraft as a precaution pays the line fee as an insurance premium of sorts, and should decide whether the cover is worth it, and how much of it is needed.

Can a line fee be negotiated?

Usually, as part of the total price rather than alone. A bank looks at what the whole relationship earns and how much capital the limit uses, and a smaller limit reduces both the fee and the bank's commitment. A borrower with a record of predictable use, or a competing offer, has the stronger hand. Moving price from the margin to the fee, or back, changes who benefits at different levels of use, so any trade should be worked through at the expected balance.

How do you compare a line fee with a lower margin?

By adding both to the base rate at the balance the business expects to carry. Take the annual interest on that balance, add the annual line fee on the whole limit, and divide by the balance. Do this for each offer and at more than one balance, since a low-margin, high-fee offer wins at high use and loses at low use. Any one-off fee should be spread across the years of the facility before the comparison is made.

Is a line fee paid monthly or annually?

It depends on the letter. Although quoted as an annual percentage, a line fee is commonly calculated daily and charged monthly or quarterly, and some banks charge it in advance. The UK overdraft equivalent, an arrangement or renewal fee, is more often taken as a single annual amount when the limit is set or renewed. Because timing affects cash but not the annual total, what matters when comparing offers is the annual rate and the amount it is charged on.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Line Fee: a Worked Example

You pay for the size of the limit, not for what you borrow.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A line fee is the running cost of having a limit. The rate is low enough to overlook, but it is charged on the full facility, so its true weight depends on how little of the facility the business uses. Set against the money actually borrowed, a fee of 1% on a limit of which a third is used on average adds about 3% to the cost of those dollars. The fee is cut most directly by asking for a limit that fits the need, which makes it as much a decision about sizing as about price.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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PART OF How Banks Price a Business Loan

// 01 — WHAT THE FEE IS PAYING FOR

A bank that sets a limit for a business has made room for that limit in its own balance sheet. The fee pays for that room whether the business uses it or not. In New Zealand and Australia it is a usual part of the price of an overdraft or a bank revolving line, charged alongside interest on the drawn balance. In the UK the same idea more often appears as an annual arrangement or renewal fee on the overdraft limit, paid once a year rather than accruing, and syndicated agreements may call it a facility fee.

What the fee buys depends on the facility. On a committed line it buys a contractual right to draw. On an overdraft that is repayable on demand, which many are, it buys availability for as long as the bank leaves the limit in place, and it does not give the borrower a promise of the kind a term commitment gives. A business paying a line fee should know which of the two it has.

// 02 — HOW IT IS CALCULATED AND CHARGED

Fee for the day = limit × annual rate ÷ 365

Fee for the year = limit × annual rate

Cost on money used = annual fee ÷ average balance drawn

Same facility as: drawn rate = base + margin + line fee

undrawn rate = line fee

The last two lines are the useful ones. A line fee and a charge on the unused part are close relations: a margin of 2.00% with a line fee of 1.00% costs exactly the same as a margin of 3.00% with a commitment fee of 1.00% on the undrawn amount, because the fee on the drawn portion is simply margin under another name. That is why an offer with a low margin and a high line fee can only be compared with another offer once both are restated this way.

Details vary between banks and letters. The fee is typically calculated daily and charged monthly or quarterly, some banks charging in advance. Some published tariffs take the higher of the limit and the balance, so a business that goes over its limit pays the fee on the excess as well. If the limit changes in the period, the fee usually follows it from that date, and the facility letter will say how.

// 03 — THE EXAMPLE

A wetsuit wholesaler, constructed for this page like every figure in it, holds a US$2.0m overdraft. It pays a base rate of 5.00%, a margin of 2.00% and a line fee of 1.00% on the limit. For nine months its balance averages US$0.4m. For the three months of the pre-summer buying season, it averages US$1.5m, against a peak of US$1.7m. These rates are the example's, not a market norm.

Average drawn (0.4 × 9 + 1.5 × 3) ÷ 12 = 0.675m

Interest 675,000 × 7.00% = 47,250

Line fee 2,000,000 × 1.00% = 20,000

Year's cost 47,250 + 20,000 = 67,250

On money used 67,250 ÷ 675,000 = 9.96%

Line fee alone 20,000 ÷ 675,000 = 2.96%

As a drawn and undrawn rate:

675,000 × 8.00% + 1,325,000 × 1.00% = 67,250

A US$0.75m limit, with a US$1.0m uplift for three months:

Line fee on core 750,000 × 1.00% = 7,500

Line fee on uplift 1,000,000 × 1.00% × 3 ÷ 12 = 2,500

Fee to set up uplift 1,000,000 × 0.25% = 2,500

Fees = 12,500

Year's cost 47,250 + 12,500 = 59,750

On money used 59,750 ÷ 675,000 = 8.85%

Saving 20,000 − 12,500 = 7,500

A saving of US$7,500 is real and it has a cost. Off-season, the wholesaler's headroom falls from US$1.6m to US$0.35m. If a large retailer pays a month late in the off-season, the smaller limit may not stretch, and asking for more in that week is a harder conversation than having it. The peak during the uplift, US$1.7m against a US$1.75m limit, leaves almost nothing either, so the bank would want the season's forecast before agreeing it. The fee is really buying room for the bad month, and the question is how much of that room a business wants to pay for.

// 04 — HOW IT DIFFERS FROM THE CHARGES BESIDE IT

An establishment fee is paid once for setting a facility up; a line fee recurs for as long as the limit exists. Interest is charged on the balance. A utilisation fee is added only once drawings pass a stated level, so it rewards a line for sitting quiet and a line fee does not. Where a letter uses a less familiar name, the base it is charged on will tell a reader what it is. A seasonal facility is the structural cousin of the uplift in the example: a limit that exists only for the months it is needed, usually with its own fee.

DEFINED IN ONE PARAGRAPH → · PRICING AND FEES → · THE ALL-IN RATE →

// 05 — WHERE IT DECIDES A FILE

Limit reviews are where the fee has most effect. A borrower that can show twelve months of daily balances has the evidence for a smaller limit, or for a core limit with a seasonal top, and a bank is often willing to agree because it frees capacity for its own use. A borrower that cannot show them is arguing from memory. On the lender's side the same record tells a story about the business. A limit that has been high for years and used only at the edges may hide a need that has gone away; a limit that sits near full every month may be doing a term loan's work.

The line fee also tends to change with the review. When a bank reprices, it may move the fee and leave the margin alone, which can look like nothing has happened until the first quarter's statement arrives. Reading the fee line, and the base it applies to, is part of reading a renewal.

WHY YOUR BANK REPRICED YOUR LOAN → · PRODUCT FILE: OVERDRAFT →

// QUESTIONS PEOPLE ASK

Do you pay a line fee if the overdraft is not used?: Yes, in the usual form. The fee is charged on the limit, so it is payable for as long as the limit is in place, even with a nil balance all month. Interest is the part that depends on use. A business that holds an overdraft as a precaution pays the line fee as an insurance premium of sorts, and should decide whether the cover is worth it, and how much of it is needed.
Can a line fee be negotiated?: Usually, as part of the total price rather than alone. A bank looks at what the whole relationship earns and how much capital the limit uses, and a smaller limit reduces both the fee and the bank's commitment. A borrower with a record of predictable use, or a competing offer, has the stronger hand. Moving price from the margin to the fee, or back, changes who benefits at different levels of use, so any trade should be worked through at the expected balance.
How do you compare a line fee with a lower margin?: By adding both to the base rate at the balance the business expects to carry. Take the annual interest on that balance, add the annual line fee on the whole limit, and divide by the balance. Do this for each offer and at more than one balance, since a low-margin, high-fee offer wins at high use and loses at low use. Any one-off fee should be spread across the years of the facility before the comparison is made.
Is a line fee paid monthly or annually?: It depends on the letter. Although quoted as an annual percentage, a line fee is commonly calculated daily and charged monthly or quarterly, and some banks charge it in advance. The UK overdraft equivalent, an arrangement or renewal fee, is more often taken as a single annual amount when the limit is set or renewed. Because timing affects cash but not the annual total, what matters when comparing offers is the annual rate and the amount it is charged on.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Treasury analystFunds the bank and manages the interest rate and liquidity risk created by its own balance sheet.
Product managerOwns what the bank sells rather than who it sells to — the design, pricing, terms and lifecycle of a lending, deposit or payments product.
Business relationship managerCarries a book of trading businesses — wins them, keeps them, and is the bank's voice when the answer is no.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE CALL · THE LOAN · PRICE

A borrower's finance director says its weighted average cost of capital is 9%, so a project returning 11% creates value. The project is far riskier than the rest of the business.

What does the lender question?

5 MORE ON THE LOAN · PRICE →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHLine fee What is a line fee on a business loan?