Business Loan Calculator

There are three different pricing models for business loans, only one of which uses an interest rate. The terms offered by a bank is 9.5%. Short term lenders offers will include an add on to the interest rate (10%), while cash advance companies offer multiples of the amount (1.25).

These three figures cannot be directly compared with each other and the situation becomes even more complex when different charges are added. This calculator allows you to compare two offers side by side by calculating what you will actually pay as well as the corresponding annual percentage rate (APR) for each, regardless of the conditions offered.

Three methods of pricing commercial loans.

Interest rate

This is the most common method. Interest accrues on the remaining balance so as the amount owed decreases, interest charges decrease accordingly. Bank loans, SBA loans, equipment financing and most amortizing loans use this method.

The repayment amount is calculated using a standard amortization formula.

M is the repayment amount, P is the loan amount, i is the interest rate per amortization period and n is the number of installments. If the loan amount is $10,000, the interest rate is 10% and the term is five years with monthly repayments then i is the value of 0.10 divided by 12 and n is 60.

For a total repayment of $12,748.23 over sixty payments at $212.47 each, the interest is $2,748.23.

Simple or add-on interest.

This method calculates the entire interest rate for the whole term at once and adds it to the original principal amount. The total is then spread evenly over each payment.

The problem is that interest continues to accrue on the money you've already paid back. A five-year loan at 10% with add-on interest isn't a 10% loan. While you're paying back $15,000, what was actually borrowed was only $10,000. When you calculate the actual cost, your annual percentage rate (APR) is 17.27%, which is nearly double what's listed on the loan documents.

Multiplication method.

For commercial prepayments and many short term online loans the percentages are not stated but instead a multiple is used. This multiple is then multiplied by the prepaid amount to get the repayment figure. That's all there is to it.

A 1.25 factor on $10,000 means you will pay back $12,500 whether the term is twelve or six months. An important difference from a loan with interest is that in a factor model of transaction there are no savings to be made if the contract is terminated early. The effective annual rate (EAR) increases dramatically by compressing the same fixed costs into a shorter period.

With the same factor of 1.25 and the same cost of $2,500, doubling the payback doubles the effective annual rate (APR). Before comparing a double-up offer with other terms, convert the double-up to an effective annual rate.

Fees and why interest doesn't always represent total cost

Commercial lenders charge fees. There is often a processing fee charged as a percentage of the loan amount (usually between 1% and 6%) used to cover processing and underwriting costs. Document fees and closing costs cover administrative tasks. Additionally, there may be package fees, appraisal fees, title insurance charges, origination fees, and recording fees.

Almost all fees are deducted from the loan amount and not charged separately. This is a point that is often overlooked. While you pay interest on the entire loan amount, you actually receive less in your account.

If a $10,000 loan has an origination fee of 5% and processing fees of $750, you don't actually get the full $12,500. The repayments are still based on $10,000. If you take the actual amount you receive ($8,750) as the basis for calculating the costs, then the effective annual total cost of this loan (10%) is 15.93%.

If you really want to get a certain amount of money, the other part of the calculation is just as important. If your project needs $100,000 and the fees are 3% and $500, asking for $100,000 won't work - it will fall short by $3608; you would need to ask for $103,608. By enabling exact amount checking, the tool calculates that result.

Fees are a much larger burden on short-term financing than long-term financing, as the same one-time fee is spread over fewer repayments. Adding a 3% origination fee to a 10% loan increases the effective annual rate (APR) by about 1.3 points within five years and about 5.8 points within one year.

How does a lender assess repayment ability?

Credit analysts almost never start their analysis with the calculated repayment amount. Instead, they first check the Debt Service Coverage Ratio (DSCR). This value is obtained by dividing a company's generated cash flow by the amount required to pay off debt.

A DSCR of 1.0 means that the repayments will use up all available cash surplus. Most lenders prefer a value of 1.25 leaving a buffer of a quarter of the cash flow. A value below 1.0 is a threshold at which a lender might refuse credit as repayment would depend on financing sources outside the operating business.

When the 'Cash Flow Test' function is enabled, the tool calculates values in both directions. It shows the coverage factor generated by the loan and calculates backwards based on the target value. This means that it determines the maximum repayment amount covered by your cash flow as well as the maximum loan amount possible with this repayment amount.

How amortization works

Not all business loans use a consistent amortization rate to reduce the balance to zero. This tool takes into account the three types of amortization schedules that lenders actually offer.

Full amortization is the standard method. Each payment covers interest and pays back a portion of the principal so that at the end of the term the balance is zero.

With capital-only repayments the instalments are lower over the term of the loan but at the end of the term all the money is paid back in one lump sum. This can be suitable for bridging loans where a sale or refinancing is expected, but it can be risky if there's no clear plan as none of the capital will ever be repaid.

The end-of-term repayment means that there are no repayments during the entire term. The interest is automatically compounded and at the end of the term, the whole amount must be repaid in one lump sum.

Repayment frequency:

Bank and SBA loans are repaid monthly. Short term online lenders and cash advance companies usually take a weekly or daily direct debit from the business account on business days.

Daily debits are a significant problem. They take cash out of the company before receivables are paid. While a company may be able to handle monthly payments, it can run into financial trouble if the same amount is debited daily. The frequency selection range includes both years based on business days (252) and calendar years (365). Lenders use both types of years.

Types of Business Loans:

• SBA 7(a): The main SBA program with a maximum amount of up to $5 million that can be used for working capital, equipment, acquisitions and real estate. The term is ten years for working capital while the term for real estate is up to 25 years. The approval process is slow and requires much bureaucracy but terms are reasonable.

• SBA 504: Long-term fixed rate loans for real estate and large equipment with a maximum of $5.5 million and terms of 10, 20 or 25 years. They cannot be used for working capital or inventory.

• SBA Microloans: Up to $50,000, averaging about $15,000 with a maximum term of six years. They are for start-up and growing businesses.

• Term loans are one-time loans offered by banks and online lenders with terms ranging from three months to ten years. They're a mainstay of commercial lending.

• Line of credit: An amount that can be drawn on as needed with interest only charged on the actual amount used. Because the line is replenished upon repayment, it's a good fit for fluctuating working capital needs.

• Investment loans: As the investment itself serves as collateral, interest rates are usually lower than for comparable unsecured loans.

• Commercial real estate financing: Similar to mortgages but with shorter terms, higher upfront costs and usually a balloon payment at the end of the term.

• Commercial Prepaid Cards: A prepaid card based on future card purchases with a price determined by a multiple system and repaid daily or weekly. The credit is fast but the cost is high.

• Invoice factoring or invoice financing is a way to turn unpaid customer invoices into cash either by selling the invoice or taking out a loan with the invoice as collateral.

Before concluding a contract

When comparing loan offers, you should not only pay attention to the monthly rate but above all to the effective annual interest rate (APR). A low monthly rate often means a longer term and higher total interest, which can lead to a significantly more expensive loan.

Check to see if there are prepayment penalties, whether there is a processing fee that will be deducted from the loan amount or charged separately, and whether you can save money by making early repayments on variable rate loans - usually not.

Watch out for debt snowballing. If you take on more payments to pay off an earlier payment, a manageable debt can become unmanageable. This is a common pattern that leads to problems with short-term business loans.

This calculator is for planning and comparison purposes only. The actual terms of the loan may vary depending on creditworthiness, income, collateral, and lender's specific rules. The exact terms are laid out in the loan agreement. Have these values reviewed by a tax advisor or your lender before signing any contracts.