Two kinds of business financing
Small business financing is sold in two very different ways, and this calculator handles both.
- Term loans from banks, credit unions, SBA-guaranteed lenders and many online lenders. You borrow a lump sum at an interest rate and repay it in equal installments, usually monthly but sometimes weekly or daily.
- Factor-rate financing, used by merchant cash advances (MCAs) and many short-term online products. Instead of an interest rate you get a factor, such as 1.3, and repay the amount advanced times the factor, often through daily debits from your bank account.
The two look hard to compare, which is exactly why lenders quote them differently. The fix is to convert everything to an APR: the yearly rate at which your payments equal the money you actually receive.
The formulas
For a term loan:
P = loan amount · r = yearly rate ÷ payments per year · n = total number of payments
Payments per year: monthly 12 · biweekly 26 · weekly 52 · daily about 252 (business days)
For factor-rate financing:
Payment = total repaid ÷ number of payments
Factor charge = total repaid − amount advanced
For both, fees deducted at the start reduce the cash you receive, and the APR is found numerically: the rate per payment that makes all the payments worth the cash received, multiplied by the number of payments in a year. That is the same actuarial method US consumer lenders must use for APR disclosures.
Worked example 1: a $100,000 five-year term loan
A bank offers $100,000 at 10% for 5 years with monthly payments and a 3% origination fee taken out of the loan.
- Monthly payment: $2,124.70 for 60 months
- Total interest: $27,482.27
- Fee: 3% × $100,000 = $3,000, so you receive $97,000
- Total cost of financing: $27,482.27 + $3,000 = $30,482.27
- APR: 11.32%, because you repay as if you had $100,000 but only got $97,000
The same loan repaid weekly costs $489.11 a week and $27,168.85 of interest; repaid every business day, $100.87 a day and $27,094.14 of interest. More frequent payments save a little interest at the same rate, but the difference is small next to the effect of a higher rate.
Worked example 2: a merchant cash advance at a 1.3 factor
A provider offers $50,000 with a factor rate of 1.3, repaid by daily debits over about 9 months (189 business days).
- Total repaid: $50,000 × 1.3 = $65,000
- Daily payment: $65,000 ÷ 189 = $343.92
- Factor charge: $15,000
- It sounds like 30% over 9 months, or 40% a year. But you start repaying the next business day, so on average you only have about half the money for the period.
- The true APR is 73.0%. With a $1,000 fee deducted, it rises to 78.9%.
For comparison, the same $50,000 as a 9-month term loan at 10% would cost $2,106.38 in interest. That is the gap the calculator’s warning shows you.
Worked example 3: a short-term online loan with weekly payments
An online lender offers $50,000 at 18% for 12 months, repaid weekly, with a 2.5% origination fee.
- 52 weekly payments of $1,052.33
- Interest $4,721.18 plus a $1,250 fee: total cost $5,971.18
- Cash received: $48,750
- APR: 23.16%
Short terms make fees expensive in APR terms: the $1,250 fee is spread over only one year.
Factor rate to APR
The APR depends on both the factor and how long you have to repay. Here are APRs for daily repayments, next to the misleading “simple” yearly rate you get by spreading the factor charge evenly over the term:
| Factor rate | 6 months | 12 months | 18 months |
|---|---|---|---|
| 1.10 | 38.5% APR (looks like 20%) | 19.3% (10%) | 12.9% (6.7%) |
| 1.20 | 74.8% (40%) | 37.5% (20%) | 25.0% (13.3%) |
| 1.30 | 109.3% (60%) | 54.8% (30%) | 36.6% (20%) |
| 1.40 | 142.2% (80%) | 71.3% (40%) | 47.6% (26.7%) |
| 1.50 | 173.8% (100%) | 87.2% (50%) | 58.2% (33.3%) |
Weekly debits give almost the same result: a 1.3 factor over 6 months is about 106.6% APR. The shorter the term, the more a factor rate costs. Some MCAs are repaid as a percentage of daily card sales rather than a fixed amount, so the term, and therefore the APR, depends on how fast you sell. If sales are strong, you repay faster and the APR is even higher.
Where business loans come from
| Source | Typical features |
|---|---|
| SBA 7(a) loans (through banks and lenders) | Up to $5 million; long terms (up to 10 years for working capital and equipment, 25 for real estate); maximum rates set by the SBA as a spread over the prime rate; an SBA guarantee fee on many loans |
| SBA 504 loans | Long-term fixed-rate financing for real estate and major equipment |
| Bank and credit union term loans | Lower rates for established businesses with collateral |
| Online term loans | Faster approval, shorter terms, higher rates; often weekly or daily payments |
| Merchant cash advances | Factor rates, daily or weekly debits, very high effective APRs; legally an advance on future sales rather than a loan in many states |
SBA terms and maximum rates change; check the current rules on the SBA’s website before you apply.
Tips for borrowing smart
- Convert every offer to an APR. Use this calculator for each quote, including all fees. A “1.15 factor” and a “15% rate” are very different.
- Look at cost per dollar. Total cost ÷ cash received tells you what each dollar of financing costs over its life.
- Match the term to the purpose. Use short financing for inventory you will sell quickly, longer terms for equipment that lasts years.
- Check cash flow. Daily debits come out whether you had a good day or not. Make sure your slowest weeks can carry the payment.
- Ask about prepayment. With term loans, paying early saves interest. With factor financing the full factor charge is often owed even if you repay early, so early payoff saves nothing unless the contract offers a discount.
- Compare with personal options carefully. A personal loan can be cheaper for a small amount, but it puts your personal credit on the line.
Common mistakes
- Treating a factor rate as an interest rate. A 1.25 factor is not 25% a year. Over six months of daily payments, it is closer to 90% APR.
- Ignoring fees. Origination, packaging and underwriting fees can add several points to the APR on short loans.
- Stacking advances. Taking a second cash advance to cover the first one’s payments compounds the cost quickly.
- Comparing payments instead of total cost. A lower daily debit over a longer period can still cost more.
Related calculators
The APR calculator turns any rate-and-fee combination into one comparable number. For a detailed payment table on a monthly loan, use the amortization calculator, and for any general installment loan, the loan calculator.