Small Business Loan Calculator: The Basics

sba loans

Let's Get Started

Table of Contents

    Key Takeaways

    • A small business loan calculator provides an easier way for borrowers to calculate the total cost of borrowing. To use it, you simply have to enter the loan amount, APR, and repayment term. The calculator will then show you three results: the monthly payment, total payments, and the total interest paid at the end of the repayment term.
    • Lenders describe the cost of borrowing in three ways: interest rate (most common), factor rate, and discount rate.
    • The annual percentage rate, or APR, is the annualized amount charged to a financing product. The APR is inclusive of the interest rate and other fees associated with the financing.
    • Lenders usually charge additional fees on top of the interest rate, including application fees, origination fees, late payment fees, prepayment fees, and check processing fees.

    A small business loan can be a helpful resource in growing your business. However, it doesn’t come without a cost (literally). It’s important to know what these are, so you’re aware of the things you’ll be paying for and avoid surprises along the way.

    When applying for a business loan, the lenders will give you an outline of the terms they would be willing to offer you. The offer will include the loan amount, quoted interest rate, and the repayment length or term.

    By using a business loan calculator, you can get an estimate of how much the loan will cost you. Aside from that, it can also suggest different loan options that suits your business needs and situation.

    If you’re not familiar with how it works, we’re here to help. Read on to learn more about small business loan calculators and how to use them.

    Ready to apply for a Small Business Loan Calculator?

    How Do a Small Business Loan Calculator Work?

    Manually calculating your business loan costs is possible, but it can be challenging, especially if you don’t understand the factors that go into the calculation. An online small business calculator provides an easier way for business owners to determine the costs of business financing.

    The steps involved in using the business loan calculator are pretty straightforward. You simply have to input the loan amount, term or repayment length, and the quoted interest rate, and the calculator will automatically compute your costs.

    In general, the business loan calculator will show you the following:

    • Monthly payments – the amount you’ll pay towards the loan every month.
    • Total payments – the sum of all the payments you’ll make towards your loan at the end of the repayment period.
    • Total interest paid – represents the total amount the financing company charges you for the financing.

    From there, you can determine whether you’ll be able to afford the loan repayments without putting additional strain on your cash flow.

    Some loan calculators may also be able to give out financing suggestions. That said, expect to answer some questions as you go. It may ask you about your credit score, loan purpose, business zip code, and more. After answering those questions, you’ll then be shown the different loan options available for you based on your situation.

    How Lenders Quote Business Loan Costs

    When it comes to business financing, there is no universal standard used in determining the costs of the loan product. Depending on the type of business financing you apply for, the lenders will typically use different terms when referring to the loan’s costs.

    As a business owner, you must know how the lenders structure the borrowing costs. It will help you understand how the loan will affect your finances. With that, here are the three most commonly used terms that lenders use in quoting the business loan’s price:

    1.    Interest Rate

    If you’ve had a credit card, mortgage, or student loan, then you’re probably familiar with interest rates.

    Interest rates are the most commonly used terms to describe the cost of borrowing. It’s a percentage of the principal amount that lenders charge the business for the use of their assets. Most lenders use interest rates in most of their business loan products – whether it’s short-term, intermediate-term, or long-term loans.

    To put it into perspective, here’s a simple example:

    Suppose you borrowed $100,000 to cover your business’ ongoing expenses, payroll, and others. The lender offers a repayment term of five years with an interest rate of 5%. But it’s worth noting that lenders compute interest rates on a yearly basis. According to the loan calculator, this puts your monthly payment at $1,887.12 over the course of five years. This means that the total payment for the loan will be $113,227.20, and the total interest you’ll pay for the loan will be $13,227.2.

    The repayment structure for interest rates is usually broken down into three parts: interest, principal, and balance. This is known as amortization. Although you will be paying a fixed amount ($1,887.12) each month throughout the loan’s term, your first few payments will go towards paying the financing’s interest. As you make repayments, your loan balance will gradually be reduced, and the amount you’ll pay in interest will also be reduced.

    2.    Factor Rate

    Other lenders may also use a factor rate to express the cost of the use of assets. Unlike interest rates which are expressed as a percentage, factor rates are expressed in decimal form. Factor rates usually range from 1.1 to 1.5, depending on the lender and your creditworthiness.

    To get your total payment, you simply have to multiply the factor rate by the principal amount. For example, if you borrowed $100,000 with a factor rate of 1.5, your total payment would amount to $150,000 ($100,000 x 1.5). That means you’ll be paying $50,000 towards the cost of borrowing money.

    While interest rates are charged on a yearly basis based on the balance you carry, factor rates are charged on the original principal amount, so the total cost won’t change as you pay your debt down.

    Lenders usually use factor rates in some of their short-term business financing products, specifically merchant cash advances.

    3.    Discount Rate

    Short-term lenders usually use discount rates on their invoice financing products. Like interest rates, they’re expressed as a percentage of the financing amount, and they can be charged on a daily or weekly basis.

    Here’s how the discount rate works. Say that your business has $10,000 worth of outstanding invoices that’s due in 8 weeks. You decide to apply for invoice financing to free up cash tied up in your invoices. The invoice factoring company may offer to fund your invoices at a discount rate of 1% per week. With that, you’ll have to pay $100 to the financing company every week that the invoices remain outstanding.

    By the end of the 8-week payment term, assuming that all your customers settle their accounts, you will have to pay $800 on top of the principal amount.

    Note: The interest rate, factor rate, and discount rate merely describe the cost of the loan, excluding the fees that the lenders may charge on top of your total payment.

    What is an APR and How is It Determined?

    Many may think that APRs and interest rates are the same. While they are both expressed as percentages, their similarity ends there. APR or annual percentage rate refers to the annualized amount charged to the loan. It includes the interest rates and other fees associated with the financing (i.e., closing fees, processing fees, late payment fees, etc.).

    APR can come in especially handy if you’re comparing two loan offers of the same kind (i.e., two equipment loans or two invoice financing). For instance, while shopping for loan offers, two lenders offered an interest rate of 10% for a short-term loan. Lender X charges an additional 2% in fees, while Lender Y charges 4%.

    Which of the two is more affordable? Obviously, it’s Lender X. With Lender X, you’ll be paying 12% APR. In comparison, you’d end up paying 14% with Lender Y. This 2% difference may not seem much, but if you’re planning to borrow a significant amount of capital, the more the 2% difference in the APR will cost you.

    Factors that affect APR

    Fees are just one part of the puzzle when it comes to APRs. Other factors like the type of loan, credit score, financials, etc., can also play a role in the final calculation of your APR.

    Here’s how they can affect the APR:

    1.    Type of Loan

    Some loans cost more than others. For instance, a merchant cash advance may be more expensive than SBA loans. This is because SBA loans are government-backed-up loans. This assurance lessens the risk the lenders face. In turn, they’ll be more inclined to offer lower rates.

    2.    Business Credit Score

    Your business credit score is one of the first things that lenders will look at when you’re applying for a loan. Your credit rating is basically a testament to your credit and repayment behaviors. In general, the higher your rating is, the more creditworthy you are, and the lower your APR would be. On the other hand, low credit scores pose a greater risk to lenders. Thus, they’ll likely be offered a higher APR for the financing.

    3.    Business History

    Businesses that have been operating for quite some time have a greater likelihood of getting loan offers with favorable APRs. At the very least, your business should be operating for at least six months to qualify for a loan. However, if you’re looking to qualify for a more comprehensive loan, such as those offered by the SBA or long-term loan, having at least two years of business history would be ideal.

    4.    Business financials

    Just like having a good credit score, showing the lenders that you have a healthy month-to-month cash flow will increase your chances of qualifying for lower APRs. Lenders will want to know that you’ll be able to afford your business’ expenses as well as loan repayments.

    5.    Asset Pledged or Collateral

    Though collateral is not required for all loan products, pledging one when applying for a business loan may improve your odds of qualifying for a lower APR. The collateral will serve as the repayment for the loan in case you default on the loan. With that, the lenders get to mitigate the risk, and they will feel more comfortable offering favorable terms.

    6.    Funding Speed

    If you’re in a hurry to get access to cash, you’ll have to consider working with lenders that can process your loan application and get your business funded within days. But know that they typically charge a higher interest rate, and therefore, APR, in exchange for convenience.

    Tip: You can reduce your total loan cost in several ways. This includes making minimum payments on time (to avoid late payment fees), showing a good credit standing upon application, asking the lenders about discounts and prepayments, and offering valuable collateral.

    Ready to apply for a Small Business Loan Calculator?

    What Other Loan Costs Should You Be Aware of?

    As mentioned, small business lenders may charge additional fees on top of the interest rate. While all the costs will be included in the final APR calculation, it’s still imperative to know what the fees are, so that you’ll be aware of what you’ll be paying for.

    When reviewing the loan contract or inquiring for business financing, here are the fees that you’ll want to be on the lookout for:

    1.    Origination Fee

    Lenders may also charge an origination fee, which essentially covers the administrative and servicing costs. It’s usually expressed as a percentage of the principal amount. For example, if you secured financing worth $10,000 and the lenders charge a 1% origination fee, you’ll have to pay $100 upfront for the origination fee.

    2.    Application Fee

    Application fees refer to the charges that the lenders incur as they perform a background and credit check for each of their borrowers. While some may forego this fee, others will pass it on to the borrower and charge it upon closing.

    3.    Late Payment Fee

    If for some reason, you were unable to pay the required monthly payments for your loan, the lenders will charge a late payment fee. Lenders may also charge a late payment fee even if they automatically deduct the payments from your bank account, if they find that your account has insufficient funds.

    4.    Prepayment Fee

    If you decide to pay off your loan early to save on interest, lenders may charge a prepayment penalty. This somehow assures them that they’ll still be able to earn the costs of preparing and providing you the financing. Sometimes, lenders may charge a higher prepayment fee to discourage the borrowers from terminating the loan contract earlier than agreed.

    5.    Check Processing Fee

    Some businesses may prefer to use checks in repaying loans. In that case, the banks will have to process these checks, which comes at a cost. Some lenders will also pass this cost on to the borrowers at closing. However, as electronic payments become more and more popular these days, it’s essential to verify if the lender accepts checks as one of their modes of payment.

    Important Note: Not all lenders charge the same fees. For instance, Lender X may charge a prepayment fee, while Lender Y may not. Knowing the fees is essential because even a small percentage of difference can go a long way.

    Ready to apply for a Small Business Loan Calculator?

    Final Thoughts on Small Business Loan Calculator

    Computing the final costs of your loan can be tedious if you do it by hand. Thanks to technology, developers have created small business loan calculators to make loan computations easier.

    While loan calculators don’t give you the exact cost of your loan, they can be a helpful tool to assess the potential costs. Before moving forward with any loan application, it’s always wise to do your own calculations first. This way, you’ll know whether you’ll be able to afford the repayments and not end up with more debt than before, which essentially hurts your company’s bottom line.

    Ready to apply for a Small Business Loan Calculator?