How much does a business loan cost?

The arithmetic

Illustrative only — $100,000 borrowed over 60 monthly payments at an 11% nominal annual rate.

The monthly rate is 11% / 12 = 0.9167%. The payment is $2,174.24. Over 60 payments you repay $130,454.40, so interest costs $30,454.40.

Add a 2% origination fee deducted at funding. You received $98,000, so your cost is $32,454.40, and the rate that discounts 60 payments of $2,174.24 back to $98,000 — multiplied by twelve — is 11.88%.

Where the money goes early

The first payment splits $916.67 to interest and $1,257.57 to principal. Interest is charged on the balance, so the split shifts toward principal every month. This is why the total interest on a long loan is so much larger than the rate suggests, and why paying early on this kind of debt genuinely saves money.

The other things that are cost

What changes the number most

Term, not rate. The same $100,000 at the same 11% over 36 months costs far less in total interest than over 60, because the balance falls faster — and demands a much larger payment while it does. Every extension of the term buys a smaller payment with more dollars.

Illustrative only — over 36 months the payment rises to $3,273.87, an increase of $1,099.63 a month. Total repaid falls to $117,859.32, so interest falls to $17,859.32 — $12,595 less than the five-year version.

That is the whole trade. Twelve and a half thousand dollars of interest, bought with eleven hundred dollars a month of cash flow for three years. Whether it is a good trade depends on whether the eleven hundred is available every month, including the bad ones, because a term you cannot service is not cheaper than a term you can.

What prepaying is worth

Illustrative only — take the 60-month loan and clear it at the end of month 24.

You have made 24 payments of $2,174.24, or $52,181.76. The remaining balance is $66,411.96, so principal has fallen by $33,588.04 and you have paid $18,593.72 of interest. Paying the balance at that point avoids the remaining $11,860.68 of interest.

Check two things before treating that as a saving. Whether the note carries a prepayment charge, and how it is calculated — a percentage of the balance, a set number of months' interest, or a yield maintenance formula. And whether the quoted payoff is the balance or the balance plus something else. Ask for a written payoff statement with a good-through date.

None of this applies to an advance priced as a fixed factor, where the whole cost is usually owed whenever you repay. That is the practical difference between interest, which accrues on a balance over time, and a purchased amount, which does not.

Fee deducted or fee financed

Illustrative only — the same 2% fee, handled two ways.

Lenders present the financed version as the borrower-friendly one, and at closing it is. In total dollars it is not.

How to compare two quotes that are not quoted the same way

Reduce both to four numbers before comparing anything:

1. Cash that reaches your account.
2. Total of every payment across the full term.
3. Every fee not inside those payments, including contingent ones and ones paid to third parties.
4. The number of payments, and how often they fall.

Then compute the annualised rate on the cash received rather than on the face amount. Two offers quoted as "11%" and "1.18 over 14 months" cannot be compared in their native units at all, and the second one has no time dimension until you supply the term.

If the rate is variable

Many business term loans and most lines of credit are quoted as a base rate plus a spread, and the base moves. "Prime plus three" is not a price; it is a formula, and the payment recalculates when the base changes.

Three things to establish in writing:

• Which base, and where it is published.
• When it resets — monthly, quarterly, or on the base's own change date — and whether a reset changes the payment or the term.
• Whether there is a floor, which is common, and what it is. A floor means the rate can rise with the base but cannot fall below a stated level.

Then price the loan twice: once at today's rate, and once with the base two points higher. If the second version breaks your coverage, the loan is larger than the business can carry, whatever the current payment suggests.

The figure to write down

Total of all payments, plus fees not included in those payments, minus cash received. That is the cost, and it survives any difference in how two lenders quote. Put the annualised rate beside it, computed on the cash you received rather than the amount on the note. The calculators will do both from the schedule.