How a business loan's payment is worked out
A business term loan is repaid in equal monthly instalments over an agreed schedule, used for anything from equipment and inventory to working capital or buying out a partner. The payment comes from the same fixed-repayment formula behind any instalment loan: each payment covers the interest owed on whatever is still outstanding, then reduces the balance by whatever is left over, so the balance and the interest charged on it both fall a little each month. If you are financing a personal purchase rather than a business one, the general Loan Calculator covers the same fixed-repayment math without the commercial-lending extras below.
Borrow 100,000 at a 9% rate over 5 years (60 months) and P is 100,000, r works out to 0.0075 a month and n is 60; the formula returns a payment of 2,075.84 a month, adding up to 124,550.13 repaid in total, 24,550.13 of it interest. That figure alone only tells part of the story on a commercial loan, though, because it says nothing yet about the fee taken out before the money reaches your account.
The origination fee: deducted from what you receive
Commercial lenders almost always charge an origination fee to cover underwriting, and unlike some consumer personal loans it is not usually a choice between two structures: the fee comes straight off the amount advanced. Traditional banks tend to charge the least, often only 0.5% to 1%; online and alternative business lenders commonly charge 1% to 10%. Borrow 100,000 at a 2% fee and you receive 98,000, while the payment above is still calculated on the full 100,000 you owe, the working-capital honesty this tool is built to show plainly rather than bury in a disclosure document.
Because interest is being paid on more money than actually reached the account, the rate on the paperwork understates the real cost. This calculator solves its own "effective APR": the rate that would produce the same monthly payment if it were charged directly on the 98,000 actually received rather than the 100,000 face amount. There is no algebra that rearranges the payment formula to solve for that rate directly, since it sits both outside and inside a power on both sides of the equation, so the answer is found the same way the Interest Rate Calculator and the Personal Loan Calculator on this site find an implied rate: by testing rates between two brackets and narrowing in until the resulting payment matches, a method called bisection. On the example above, a 2% fee lifts the effective cost from the 9% quoted to just under 9.9%, a gap that grows on a shorter term and shrinks on a longer one, since a fixed fee is spread over fewer or more payments either way.
Balloon payments: amortised long, due short
Balloon structures are common on commercial real estate loans and some equipment financing: the monthly payment is calculated as though the loan amortised over a long schedule, commonly 10 to 25 years, but the loan is not actually carried that long. Instead, whatever principal is still outstanding falls due in full on a much shorter date, often 3, 5, 7 or 10 years in, typically met by refinancing or selling rather than by saving up the cash.
Take that same 100,000 loan at 9%, now amortised over 10 years (120 months) instead of 5, with a balloon due in 3 years (36 months). The longer schedule drops the payment to about 1,266.76 a month, well below the 5-year figure, but by month 36 the balance still owed comes to roughly 78,734, the amount due in one lump sum. The smaller payment is real, but so is the sum still owed at the end; a balloon structure trades one for the other, and it adds a refinancing risk a fully amortising loan does not carry, since a new loan is not guaranteed at any particular rate, or at all, when the balloon date arrives. Turn the switch above off and this loan behaves like any other fully amortising term loan, no lump sum due early.
The DSCR lens: does the income actually cover it
Debt-service coverage ratio (DSCR) is the figure a commercial underwriter checks before almost anything else: monthly net operating income divided by the monthly debt payment. A DSCR of 1.25 means the business generates 1.25 for every 1.00 owed each month, a 25% cushion above simply breaking even.
Most lenders want a DSCR of about 1.25 or higher before approving a loan like this one, though the exact floor varies: some accept 1.15 to 1.20 for well-qualified borrowers, and commercial real estate lenders often ask for a similar 1.20 to 1.25 range. Type in a monthly net income above and the "Debt-service coverage" panel checks it against the payment directly; 3,000 a month of income against the 2,075.84 payment on the default example above works out to a DSCR of roughly 1.45, comfortably past the common 1.25 floor. Leave the income field at 0 and this section simply asks for a number rather than guessing at one.
The factor-rate translator: what a merchant cash advance really costs
A merchant cash advance or similar product is not priced as an interest rate at all: it uses a factor rate, typically 1.1 to 1.5, that simply multiplies the amount advanced into a fixed total owed. A 1.3 factor rate on a 100,000 advance means repaying 130,000, in fixed instalments spread across an agreed term, however long that term happens to be.
A quick shortcut some brokers quote divides the extra cost by the term in years, roughly (factor rate − 1) ÷ years, but that understates the real cost, because it assumes the full amount stays owed for the entire term when in fact it is being paid down throughout it. This calculator instead solves for the rate honestly, the same bisection used for effective APR above: treating the fixed instalment as the payment on an amortising loan of the same size and term, then solving for the rate that would produce it. On the default example, a 1.3 factor rate repaid over 12 months works out to roughly 51% APR once solved this way, well above the 30% the naive shortcut would suggest, and squarely inside the wide 40% to 350% range commonly reported for these products. A factor rate that looks modest on paper can still be one of the most expensive ways to borrow.
SBA 7(a) loans, in brief
The Small Business Administration's 7(a) programme is the most common government-backed option for small businesses in the US: the SBA does not lend the money itself but guarantees part of a bank's loan, which lets participating lenders offer longer terms and lower rates than they might otherwise extend. Rather than setting the rate directly, the SBA caps the spread a lender may add to the prime rate, currently 2.25 percentage points above prime on loans over 50,000 with terms under seven years and 2.75 points on terms of seven years or more, with wider spreads permitted on smaller loans; that cap is why 7(a) pricing tends to sit below what many online or alternative lenders quote for similar risk, though it still moves with the prime rate itself.
Choosing your inputs, and the personal guarantee
Enter the note rate from your loan offer or estimate, not a fee-adjusted figure of your own; the calculator folds the origination fee in for you rather than needing it pre-mixed into the rate. Use the amortisation term as the full schedule the payment is based on, and only turn the balloon switch on if your actual offer carries one, matching its due date to what your term sheet states. Most business term loans, even ones marketed as unsecured, still require anyone who owns a meaningful share of the business to sign a personal guarantee, so incorporating as an LLC or a corporation does not by itself shield personal assets if the loan goes unpaid; that is worth weighing alongside the numbers above, not instead of them.
Why business loan rates sit above mortgage rates
Business loan rates typically run well above mortgage rates for a broadly similar borrower because a mortgage is secured against one specific, appraised, resaleable property that a lender can repossess and sell if payments stop, while a term loan is frequently unsecured, or secured only against a business's own equipment, inventory or receivables, assets that are harder to value, harder to resell, and that can lose most of their worth exactly when the business itself is struggling. The rate charged has to price in that extra risk, which is also why a strong DSCR and a clean credit history do more to move a business loan quote than they typically do on a mortgage.
Questions people ask
Why do I only receive $98,000 on a $100,000 loan?
Because the origination fee, 2% in that example, is deducted from the amount advanced before it reaches your account, while the payment is still calculated on the full $100,000 you legally owe. That gap is exactly what the "effective APR" figure above is built to make explicit.
What DSCR do lenders actually want?
Most look for around 1.25 or higher, though it varies: some accept 1.15 to 1.20 for strong borrowers, and commercial real estate lenders often ask for a similar 1.20 to 1.25 range. Treat 1.25 as a common target rather than a fixed rule that every lender applies identically.
How does a balloon payment work on a business loan?
The monthly payment is worked out as if the loan amortised over a long schedule, often 10 to 25 years, but the loan is not carried that long. Whatever balance remains falls due in full on a much shorter date instead, usually met by refinancing or selling, which carries its own risk since a new loan is not guaranteed at any particular rate.
Is a factor rate the same as an interest rate?
No. A factor rate simply multiplies the amount advanced into a fixed total owed, unrelated to how long the term runs. The "Factor-rate translator" above converts it into a genuine equivalent APR by solving for the rate that would produce the same fixed instalment on an amortising loan, which is usually far higher than the factor rate alone suggests.
Why is my effective APR higher than the rate I was quoted?
Because the origination fee means you are paying interest on more money than actually reached your account, and the quoted rate alone does not show that gap. The effective APR folds the fee back in against the cash you actually received.
Do I need to personally guarantee this loan?
Almost certainly, if it is a typical small business term loan. Most lenders, including SBA and bank programmes, require a personal guarantee from anyone who owns a meaningful stake in the business, regardless of whether the business itself is an LLC or a corporation.
Why are business loan rates higher than mortgage rates?
Mainly risk and security. A mortgage is secured against one specific, resaleable property; a business loan is frequently unsecured or backed only by equipment, inventory or receivables that are harder to value and can lose worth exactly when the business is struggling, so lenders price in that extra risk.
These figures are estimates for a simple fixed-rate business term loan, not financial or lending advice. Actual fees, rates, DSCR requirements and terms depend entirely on the lender's own underwriting; check your own loan estimate or credit agreement before treating any of this as final.