Finance term
Average Daily Balance
Also known as: ADB, average daily bank balance
Definition
Average daily balance (ADB) is the mean balance in an account over a period — typically a month or year — calculated by summing the end-of-day balances and dividing by the number of days. Lenders use ADB from bank statements to underwrite cash-flow-based loans, assess revenue stability, and set line-of-credit limits.
Detailed explanation
For small business underwriting, average daily balance is a key metric that lenders extract from three to twelve months of business bank statements. It gives a normalized picture of how much cash flows through the account on a typical day, smoothing out one-time deposits and seasonal swings that can make a single month's ending balance misleading.
Cash-flow lenders — including MCA funders and most alternative lenders — use ADB to size advances. A common rule of thumb is that an advance should not exceed one to one-and-a-half times the borrower's average monthly deposits, which is closely related to ADB. Lenders also look for consistency: a high ADB with stable patterns is preferable to a high ADB driven by one large deposit.
For credit card underwriting, average daily balance is used to compute interest charges: interest = (ADB × daily periodic rate × days in period). This is the standard method disclosed under TILA and Regulation Z (https://www.consumerfinance.gov/ask-cfpb/how-does-my-credit-card-company-calculate-the-interest-i-owe-en-44/). Understanding your account's ADB helps predict interest charges and guides bank statement loan qualification.
◈ Worked example
- Business account with daily balances ranging from $8,000 to $25,000 over 30 days totaling $430,000 — ADB = $430,000 / 30 = $14,333
- Credit card with ADB of $3,000 and monthly periodic rate of 2% — interest charge ≈ $60 for that billing cycle
- MCA funder reviews 6-month bank statements: ADB of $18,000/month supports an advance up to ~$25,000–$35,000 based on repayment capacity
Common questions
The most-asked questions about Average Daily Balance — answered straightforwardly.
How do lenders use average daily balance in underwriting? +
Lenders pull 3–12 months of business bank statements and compute monthly average daily balances to assess revenue consistency and cash-flow health. A rising or stable ADB signals financial health; a declining or highly volatile ADB raises repayment concerns. The ADB also informs the maximum advance or line size.
How is average daily balance different from average monthly revenue? +
ADB reflects the typical cash held in the account day-to-day; average monthly revenue reflects total deposits received. A business can have high revenue (deposits) but a low ADB if money flows out quickly — indicating thin cash reserves. Lenders look at both.
Further reading
This glossary entry is educational content. ClearValue Lending is a business & personal financing platform — not a lender, broker, or financial advisor. Specific product terms vary by lender; verify with the lender or issuer before applying. See privacy policy.
https://clearvaluelending.com/glossary/average-daily-balance