How the Business Loan Calculator Works
Business loans come in many forms. A bank term loan has an interest rate and monthly payments. A short-term loan or merchant cash advance may have a factor rate and daily or weekly payments. Most also have fees. All this makes it hard to compare offers, and to see how much a loan really costs. The Business Loan Calculator works out the payment, the fees and the true yearly cost of either kind of loan, and it can check whether your income covers the payments.
What you enter
- How the loan is quoted: with an interest rate, or with a factor rate.
- Loan amount and term: how much you borrow, and for how many months.
- How often you pay: monthly, weekly, or every business day.
- Fees: an origination fee as a percentage of the loan, and other fixed fees. Lenders usually take them out of the money you receive, but you repay the full amount.
- Yearly net operating income (optional): what your business earns before paying its debts.
A loan with an interest rate
The payment uses the standard loan formula, where P is the loan, i is the interest rate for one payment period (the yearly rate divided by the number of payments in a year) and n is the number of payments:
payment = P x i / (1 - (1 + i)^-n)
A loan with a factor rate
A factor rate is a multiplier, such as 1.25. It tells you how much you must pay back in total for each dollar you get. The interest is fixed from the start, and does not go down as you pay:
total payback = loan amount x factor rate payment = total payback / number of payments
The true yearly cost (APR)
Fees mean you receive less than the loan amount, but you repay all of it. And a factor rate hides how fast you repay. The APR solves this. It is the yearly rate at which your payments are worth exactly the cash you actually receive. It is found by trial, and it is the fair way to compare offers of any kind.
A worked example: a term loan
You borrow $50,000 at 9% for 60 months, paying monthly. There is a 2% origination fee and a $250 fee, so the fees are $1,250, and you receive $48,750.
| Result | Amount |
|---|---|
| Monthly payment | $1,037.92 |
| Total you repay | $62,275.07 |
| Cost of borrowing (interest and fees) | $13,525.07 |
| True yearly cost (APR) | 10.09% |
The rate is 9%, but the true cost is 10.09%, because of the fees. A longer or shorter term changes it:
| Term | Payment | True yearly cost |
|---|---|---|
| 12 months | $4,372.57 | 13.80% |
| 24 months | $2,284.24 | 11.53% |
| 36 months | $1,589.99 | 10.74% |
| 48 months | $1,244.25 | 10.33% |
| 60 months | $1,037.92 | 10.09% |
| 84 months | $804.45 | 9.81% |
The fixed fees weigh more on a short loan, so the shorter the term, the higher the true cost.
Chart: where the money goes
You receive ████████████████████████████████████████ 78% $48,750 Fees █ 2% $1,250 Interest ██████████ 20% $12,275
A worked example: a factor rate
You borrow $50,000 with a factor rate of 1.25 and the same $1,250 of fees. You pay back $62,500 in all. If you repay it over 9 months with a payment every business day, the payment is $330.69 a day. It looks cheap, because the cost is only "25%". But the true yearly cost is about 69%. The shorter the term, the higher the cost, because the total payback stays the same:
| Term | Daily payment | True yearly cost |
|---|---|---|
| 3 months | $992.06 | 205% |
| 6 months | $496.03 | 103% |
| 9 months | $330.69 | 68.9% |
| 12 months | $248.02 | 51.8% |
| 18 months | $165.34 | 34.5% |
| 24 months | $124.01 | 25.9% |
Debt service coverage ratio
Lenders often want proof that your business can afford the loan. The debt service coverage ratio (DSCR) compares your income with the yearly payments:
DSCR = yearly net operating income / yearly loan payments
A ratio of 1.25 or higher is what many lenders like to see. Between 1.0 and 1.25 is tight, and below 1.0 means the income does not cover the payments. In the term-loan example, the yearly payments are $12,455. With a net operating income of $30,000, the DSCR is 2.41, which is comfortable.
Tips
- Compare the APR of every offer. It is the only number that counts the fees, the payment schedule and the term.
- Be careful with factor rates and daily payments. They can cost far more than they seem.
- Check the payment against your cash flow, especially with daily or weekly payments, which take money out of the business all the time.
- Ask about prepayment. Some lenders still charge the full factor rate if you pay early.
What this calculator does not include
- Personal guarantees, collateral, and the lender's approval rules.
- Variable rates and balloon payments.
- Payments made on holidays and weekends, for daily loans. The calculator assumes about 21 business days a month.
- Taxes. Interest and fees on a business loan may be deductible, so ask your accountant.
This tool gives an estimate for general information only. It is not financial advice or a loan offer. The lender's loan agreement has the exact terms.