How business loan payments are calculated
Most business term loans are amortized like a personal loan: a fixed payment covers interest and principal until the balance reaches zero. The difference is that many online and short-term lenders collect payments weekly or daily from your bank account. More frequent payments reduce your balance faster but take cash out of the business more often, so compare loans on the monthly cash-flow equivalent shown above.
Why APR matters more than the rate
Origination, packaging and guarantee fees are usually deducted from the money you receive. That raises the real cost of borrowing. The effective APR here solves for the rate at which your payments equal the cash you actually receive, so you can compare lenders fairly.
Common types of small business financing
- SBA 7(a) loans: government-guaranteed loans with long terms and competitive rates, but more paperwork and slower approval.
- Bank term loans: good rates for established businesses with strong credit and financials.
- Online term loans: faster funding and looser requirements, usually at higher rates and with more frequent payments.
- Business lines of credit: borrow as needed and pay interest only on what you use.
- Equipment financing: the equipment secures the loan, which often lowers the rate.
Will the loan pay for itself?
Borrowing makes sense when the money earns more than it costs. Enter the annual return you expect from the investment, such as new inventory, equipment or marketing, to estimate the net gain after interest and fees. Be conservative: use the lowest return you realistically expect.
Frequently asked questions
What credit score do I need for a business loan?
Banks and SBA lenders often look for personal scores around 680 or higher. Online lenders may accept lower scores but charge more. Time in business and annual revenue matter too.
What is a good business loan rate?
It depends on the loan type, your credit and the lender. Bank and SBA loans usually cost the least, while short-term online loans and merchant cash advances can have much higher APRs.
Is a daily payment loan a bad idea?
Not always, but daily payments can strain cash flow, and these loans often carry high effective APRs. Compare the effective APR and monthly cash-flow equivalent before you sign.
Can I deduct business loan interest?
Interest on loans used for business purposes is generally tax-deductible in the US, subject to limits. Ask your accountant how it applies to your business.
Estimates only, not a loan offer. Terms depend on the lender, your business and your credit.