#Why the quoted rate is rarely the real cost
Business lending is quoted in at least four incompatible units: annual percentage rates, monthly interest, factor rates, and flat "cost of capital" figures. That is not an accident — incomparable quotes protect margin.
This calculator converts every offer into the one number that permits comparison: true APR including all fees, computed as the annualised internal rate of return on the actual cash flows. You put in what the lender quoted; you get out what it actually costs.
#Factor rates are the biggest trap
A merchant cash advance or revenue-based loan is typically quoted as a factor rate. A factor of 1.30 on $100,000 means you repay $130,000. Sales presentations describe this as "30% cost of capital".
It is not. If you repay that $130,000 over twelve months in daily or weekly instalments, your average outstanding balance is roughly half the principal for the whole period. You are paying $30,000 for the use of an average balance near $50,000 over one year — an APR close to 60%, not 30%.
Select Factor rate as the pricing type and the calculator performs this conversion. The result routinely surprises people who have already signed.
#What fees do to the number
Origination, underwriting, packaging and mandatory insurance are all financed out of the amount you receive but charged on the amount you borrow. A 3% origination fee on a two-year loan adds roughly 3 percentage points to the effective APR, not 1.5.
The calculator computes APR on net proceeds — what actually reaches your account — against the payments you make. That is the legally correct method and the only one that lets you compare a low-rate, high-fee offer against a high-rate, no-fee one.
#Debt service coverage ratio
DSCR is the ratio lenders use to decide whether you can afford the loan:
DSCR = EBITDA / total debt serviceMost commercial lenders want at least 1.25×, meaning your earnings cover the payment with 25% to spare. SBA lenders often want 1.15× to 1.25×. Below 1.0× you are borrowing to cover the borrowing.
The calculator flags your DSCR against these thresholds. If it comes out at 1.1×, the loan may still be approved, but you have no room for a slow quarter, a late-paying customer, or an equipment failure — and those events are not rare.
#Choosing a term
A shorter term always costs less interest and always consumes more monthly cash. The correct term is the shortest one that keeps DSCR comfortably above 1.25× with headroom.
Two further rules worth applying:
Match the term to the asset life. Financing a five-year piece of equipment over seven years means paying for it after it has stopped earning. Financing a thirty-day inventory cycle over three years means the debt outlives the reason for it several hundred times over.
Beware of prepayment penalties. Some business loans, particularly SBA 504 and certain term loans, carry declining prepayment penalties in early years. A shorter term you cannot escape is worse than a longer term you can pay down early. Use the extra payment field to model early repayment.
#Comparing offers properly
Put every offer through this calculator and compare on two figures only:
- True APR — the cost of the money
- Total finance charge — the absolute dollars you will hand over
Do not compare on monthly payment. Payment size is the variable lenders adjust to make an expensive product feel affordable, usually by extending the term. A $2,100 monthly payment can represent a 9% loan or a 44% loan depending on how long it runs.
#Typical pricing by lender type
Rough current bands for context, though pricing moves with the underlying rate environment and your profile:
- SBA 7(a) — a few points over prime; the cheapest broadly available option for established businesses
- Bank term loans — similar band for profitable businesses with two-plus years of history and strong personal credit
- Equipment finance — competitive, since the asset secures the loan
- Online and fintech lenders — commonly 15% to 45% APR, fast approval, minimal documentation
- Merchant cash advances — frequently 40% to 90%+ APR once converted from factor rates
Rate is driven mainly by time in business, revenue stability, personal credit score and whether collateral is offered.
#Tax treatment
The interest portion of each payment is generally deductible as a business expense; the principal repayment is not, because it is a return of borrowed capital. The amortisation schedule here splits every payment into interest and principal and exports as CSV — which is exactly the breakdown your accountant needs at year end.