What Is a Business Loan?
A business loan is a form of commercial financing where a lender provides capital to a business in exchange for interest payments over a set period. Understanding the true cost of business capital — including all fees and compounding effects — is essential for making informed financing decisions and maintaining healthy cash flow.
Types of Business Financing
Not all business capital is created equal. The source of your funds dictates the flexibility and total cost:
- Term Loans: A lump sum of capital repaid over a set period (1-10 years). Best for specific growth projects like equipment purchases or expansion.
- SBA Loans (7(a) & 504): Government-backed loans for small businesses with favorable terms. Lower rates and longer terms, but a longer application process and strict "Guarantee Fees."
- Line of Credit (LOC): Flexible funding that works like a credit card for your business. You only pay interest on the amount you actually draw.
- Merchant Cash Advance (MCA): An advance against future sales. Caution: These often have extremely high effective APRs (40-100%+).
The Hidden Cost: Origination & Guarantee Fees
In business lending, the interest rate is rarely the only cost. Lenders typically charge additional fees that significantly increase the true cost of borrowing:
- Origination Fees: 1-5% of the loan amount, usually deducted from the proceeds at closing.
- SBA Guarantee Fees: Fees paid to the government to secure the loan guarantee.
- Servicing Fees: Monthly or annual fees to maintain the loan account.
Our calculator factors these into the Real APR to give you the honest price of the capital.
| Loan Type | Typical APR | Term Length |
|---|---|---|
| Bank Term Loan | 6% – 12% | 1–10 years |
| SBA 7(a) | Prime + 2.25% – 4.75% | 7–25 years |
| Online Lender | 15% – 35% | 3 months – 5 years |
| Merchant Cash Advance | 40% – 100%+ | 3–18 months |
Debt Service Coverage Ratio (DSCR)
Lenders calculate your DSCR to determine whether your business generates enough cash flow to service the new debt. The formula is: DSCR = Net Operating Income ÷ Total Debt Service. Most banks require a minimum DSCR of 1.25x, meaning for every $1 of debt payment, your business should generate at least $1.25 in free cash flow.
Preparing for the Application
Banks evaluate the Five C's of Credit: Character, Capacity, Capital, Collateral, and Conditions. To secure the best rates, prepare:
- Balance Sheets & P&L Statements: For the last 3 years.
- Business Tax Returns: Last 3 years.
- Personal Tax Returns: For all owners with >20% equity.
- Debt Schedule: A list of all current business liabilities.
Floating vs. Fixed Rates
Many business loans (especially SBA 7(a)) use floating rates tied to the WSJ Prime Rate. If the Fed raises interest rates, your payment increases automatically. Use this calculator to stress-test your budget by modeling rate increases of 2-3%.
Frequently Asked Questions
What is the typical interest rate for a business loan?▼
What is the difference between APR and interest rate?▼
What is DSCR and why does it matter?▼
How does compounding frequency affect my loan?▼
Disclaimer: This calculator provides estimates for educational purposes. Actual loan terms, rates, and fees vary by lender and your business's financial profile. Consult a financial advisor or lender for precise quotes.