Calculate business loan payments and total cost.
Enter values to see the result.
Business Loan Guide
What is a business loan?
A business loan is funding provided to entrepreneurs for company development, equipment purchases, covering operational costs, or refinancing existing obligations. Unlike consumer loans, business loans offer higher amounts and better terms due to the purpose of the funds. However, banks and lenders require financial documentation and creditworthiness verification of the business.
Requirements and collateral
- Creditworthiness - banks analyze financial history and cash flows
- Collateral - mortgages, guarantees, bills of exchange, or warranties
- Operating period - most banks require at least 12-24 months of operation
- Documentation - financial statements, income tax, VAT, lease agreements
What to pay attention to?
Compare offers from several institutions before making a decision. Pay attention to the Annual Percentage Rate (APR), which includes all costs. Make sure you understand early repayment terms and any penalties. Use a financial advisor if you're unsure about the offer terms. Remember that a lower monthly payment usually means a higher total cost of the loan.
A 1.3 factor rate is not 30%. It is a 65.5% APR
Business finance is often quoted as a factor rate — borrow 50,000, repay 65,000 — which reads as a 30% cost. It is not, because you begin repaying immediately and never hold the full sum. Priced as an annual rate the same deal is 65.5%, more than double what the headline implies.
How it works
- Calculates the monthly payment and total cost of a term loan from principal, rate and duration.
- Converts a factor rate into a true annual percentage rate, which is the only comparable figure.
- Shows the total interest, so a cheap-sounding monthly payment cannot hide an expensive loan.
term loan payment = P × r(1+r)ⁿ ÷ ((1+r)ⁿ − 1) factor rate: total repayable = advance × factor the true rate solves: advance = Σ payment ÷ (1 + monthly rate)ᵗ repaying from month one halves the average balance — and doubles the effective rate
Worked example
A 50,000 advance at a 1.3 factor rate, repaid monthly over twelve months.
- total repayable: 50,000 × 1.3 = 65,000
- monthly payment: 65,000 ÷ 12 = 5,416.67
- headline cost: 15,000, or 30% of the advance
- solving for the rate that discounts those payments to 50,000 gives 4.287% a month
That is a 65.5% APR — 2.2 times the headline. The gap exists because you hold the full 50,000 only on day one and are down to your last few thousand by month twelve, while paying as though you held it throughout.
Reading the result
- The same trap appears in any product quoted as total-cost-of-capital rather than APR: merchant cash advances, revenue-based finance and some invoice factoring. If a lender will not state an APR, computing one is the first thing to do.
- Daily or weekly repayment makes it worse, not better. Faster repayment shortens the average balance further, so the same factor rate on weekly collection prices higher still, even though the total repayable is unchanged.
- Compare on APR, never on monthly payment. Extending a term loan lowers the payment and raises total interest — the two move in opposite directions and only one of them appears in the sales conversation.
- Early repayment is where the products diverge sharply. A term loan usually charges interest only for the period borrowed; a factor-rate advance almost always demands the full 65,000 regardless, which means paying it off early raises the effective rate rather than lowering it.
Common questions
- Why is the APR so much higher than the factor rate?
- Because a factor rate is stated against the full advance while you only briefly hold the full advance. By the final month you owe a fraction of the original sum but the cost was fixed at the start, so the rate you are effectively paying on the outstanding balance is roughly double.
- Is factor-rate finance ever the right choice?
- When speed or accessibility genuinely matters and no term loan is available — 65.5% for a few months to secure stock that turns a profit can still be worth it. What is not defensible is choosing it while believing it costs 30%.