Key Takeaways
- Monthly payment depends on three variables: loan amount, interest rate (or factor rate), and repayment term
- Factor rates and APR are fundamentally different -- a 1.30 factor rate can equal 30-80% APR depending on term length
- The affordability rule: total debt service should not exceed 25-30% of your gross monthly revenue
- Shorter terms mean higher payments but lower total cost; longer terms mean lower payments but higher total cost
- Your bankability score determines which rates and terms you qualify for
Before you sign any business loan agreement, you need to understand exactly what it will cost. Not the headline number on the marketing page -- the actual monthly payment, the total amount you will repay, and whether your business can comfortably service the debt while continuing to operate and grow.
This guide teaches you to calculate business loan payments yourself, understand the critical difference between factor rates and APR, and determine what level of debt your business can sustainably carry.
How to Calculate Business Loan Payments
Standard Amortizing Loan (APR-Based)
Most traditional business loans -- SBA, bank term loans, and some online term loans -- use standard amortization with an annual percentage rate (APR). The formula is:
Monthly Payment = P × [r(1+r)n] / [(1+r)n - 1]
Where P = principal, r = monthly interest rate (APR ÷ 12), n = total number of monthly payments
Let us work through an example. A $150,000 SBA loan at 11% APR over 10 years:
- P = $150,000
- r = 11% / 12 = 0.9167% = 0.009167
- n = 10 years × 12 months = 120 payments
- Monthly payment = $150,000 × [0.009167 × (1.009167)120] / [(1.009167)120 - 1] = approximately $2,067
- Total repayment = $2,067 × 120 = $248,040
- Total interest paid = $248,040 - $150,000 = $98,040
Factor Rate Calculation
Revenue-based financing, merchant cash advances, and some short-term loans use factor rates instead of APR. The calculation is simpler but the comparison to APR products is where business owners get tripped up.
Total Repayment = Loan Amount × Factor Rate
Payment = Total Repayment ÷ Number of Payments
Example: $100,000 advance with a 1.35 factor rate, repaid over 12 months with daily payments:
- Total repayment = $100,000 × 1.35 = $135,000
- Total cost = $135,000 - $100,000 = $35,000
- Daily payment = $135,000 / 252 business days = approximately $536
- Approximate APR equivalent = approximately 65%
That APR equivalent often shocks people. A 1.35 factor rate sounds modest until you realize it represents a 65% annualized cost on a 12-month term. On a 6-month term, that same factor rate equates to roughly 130% APR.
Factor Rate vs. APR: The Critical Distinction
This is the single most important concept in business loan math, and the one that costs uninformed borrowers the most money.
| Characteristic | APR (Annual Percentage Rate) | Factor Rate |
|---|---|---|
| What it measures | Annualized cost of borrowing, including compounding | Simple multiplier applied to the principal |
| Compounding | Interest compounds on remaining balance | Cost is fixed at origination regardless of balance |
| Early repayment benefit | Yes -- less interest accrues on a lower balance | Usually no -- total cost is fixed (some exceptions) |
| Term sensitivity | APR is already annualized | Same factor rate costs more (annualized) on shorter terms |
| Transparency | Standardized, federally regulated metric | Not standardized, varies by lender |
| Common products | SBA loans, bank loans, some online term loans | MCAs, revenue-based financing, short-term advances |
Converting Factor Rate to APR
To approximate the APR equivalent of a factor rate:
Approximate APR = (Factor Rate - 1) / Repayment Term in Years × 2
The "times 2" accounts for the declining balance effect in amortization
This formula is an approximation. For precise conversion, use the Internal Rate of Return (IRR) method, which accounts for the actual payment schedule. But the formula above gets you close enough for comparison shopping.
Factor Rate to APR Conversion Table
| Factor Rate | 6-Month Term | 12-Month Term | 18-Month Term | 24-Month Term |
|---|---|---|---|---|
| 1.15 | ~60% APR | ~30% APR | ~20% APR | ~15% APR |
| 1.20 | ~80% APR | ~40% APR | ~27% APR | ~20% APR |
| 1.25 | ~100% APR | ~50% APR | ~33% APR | ~25% APR |
| 1.30 | ~120% APR | ~60% APR | ~40% APR | ~30% APR |
| 1.35 | ~140% APR | ~70% APR | ~47% APR | ~35% APR |
| 1.40 | ~160% APR | ~80% APR | ~53% APR | ~40% APR |
| 1.50 | ~200% APR | ~100% APR | ~67% APR | ~50% APR |
This table makes it clear: the same factor rate produces wildly different actual costs depending on term length. A 1.25 factor on a 24-month term is a reasonable cost of capital. The same 1.25 on a 6-month term is extraordinarily expensive.
Get Your Personalized Rate
Your Bankability Score determines what rates and terms you qualify for. Check yours in 30 seconds -- no credit check, no commitment.
Check Your ScorePayment Comparison: Same Loan, Different Products
To illustrate how dramatically costs vary by product, here is what borrowing $200,000 looks like across five common structures:
| Product | Rate | Term | Payment | Total Repayment | Total Cost |
|---|---|---|---|---|---|
| SBA 7(a) | 11% APR | 10 years | $2,756/mo | $330,720 | $130,720 |
| Bank Term Loan | 14% APR | 5 years | $4,654/mo | $279,240 | $79,240 |
| Online Term Loan | 24% APR | 3 years | $7,878/mo | $283,608 | $83,608 |
| Revenue-Based | 1.30 factor | 12 months | $1,032/day | $260,000 | $60,000 |
| MCA | 1.45 factor | 8 months | $1,726/day | $290,000 | $90,000 |
Notice the tension: the SBA loan has the lowest monthly payment ($2,756) but the highest total cost ($130,720) because you are paying for 10 years. The online term loan costs less in total ($83,608) but requires $7,878 per month. The MCA costs $90,000 in fees but clears your obligation in 8 months. Each serves a different strategic purpose.
How to Determine What You Can Afford
The Revenue Rule
The most reliable affordability guideline is the revenue ratio: your total monthly debt service (all business debt payments combined) should not exceed 25-30% of your gross monthly revenue.
| Monthly Revenue | Max Monthly Debt Service (25-30%) | Approximate Loan Capacity (5yr term, 15% APR) |
|---|---|---|
| $20,000 | $5,000 - $6,000 | $150,000 - $180,000 |
| $40,000 | $10,000 - $12,000 | $300,000 - $360,000 |
| $60,000 | $15,000 - $18,000 | $450,000 - $540,000 |
| $80,000 | $20,000 - $24,000 | $600,000 - $720,000 |
| $100,000 | $25,000 - $30,000 | $750,000 - $900,000 |
The Cash Flow Stress Test
Beyond the revenue ratio, stress-test your ability to make payments under adverse conditions:
- Worst-month test: Look at your lowest-revenue month in the past 12 months. Can you still make the loan payment in that month?
- 20% decline test: If your revenue dropped 20% tomorrow, could you still service the debt?
- Stacking test: Add the proposed payment to all existing debt obligations. Does the combined total still fall under 30% of revenue?
If any of these tests produce a "no," either reduce the loan amount, extend the term, or wait until your revenue supports the obligation.
Understanding Fees Beyond Interest
Interest or factor rate is not the only cost. Business loans carry additional fees that affect the true cost of capital:
| Fee Type | Typical Range | How It Works |
|---|---|---|
| Origination Fee | 1-5% of loan amount | Deducted from proceeds or added to balance at closing |
| SBA Guarantee Fee | 0-3.75% of guaranteed portion | One-time fee based on loan amount and maturity (SBA only) |
| Closing Costs | $500 - $5,000 | Appraisals, title searches, legal fees (primarily SBA/bank) |
| Annual Fee | 0-2% of credit limit | Common on lines of credit |
| Draw Fee | $0 - $50 per draw | Some lines of credit charge per draw |
| Late Payment Fee | 5% of payment or flat fee | Triggered when payment is late (varies by lender) |
| Prepayment Penalty | 0-5% of remaining balance | Some products penalize early repayment; SBA only in first 3 years |
When comparing offers, always calculate the total cost of capital: interest + fees + any prepayment penalties. This is the true number that matters.
Using Your Bankability Score to Estimate Your Rate
Your bankability directly determines what rates you will be offered. Here is a general framework:
| Bankability Score | Likely Best Product | Expected Rate Range |
|---|---|---|
| 80-100 (Elite) | SBA 7(a), Bank Term Loans | 10-15% APR |
| 60-79 (Strong) | Online Term Loans, Lines of Credit | 15-30% APR |
| 40-59 (Moderate) | Revenue-Based, Equipment Financing | 25-50% APR equivalent |
| Below 40 (Developing) | MCA, Secured Products | 40-80% APR equivalent |
These ranges are illustrative. Your actual rate depends on the interplay of all seven bankability pillars. Check your Bankability Score for a personalized assessment.
Common Calculation Mistakes to Avoid
Mistake 1: Comparing Factor Rates to APR Directly
A 1.25 factor rate is not "25% interest." On a 12-month term, it is approximately 50% APR. On a 6-month term, it is approximately 100% APR. Always convert to the same unit before comparing.
Mistake 2: Ignoring the Difference Between Daily and Monthly Payments
A $500 daily payment is not comparable to a $15,000 monthly payment (which would be $500/day). Daily payments reduce your available cash every business day, affecting your ability to manage operational expenses that arrive on different schedules.
Mistake 3: Focusing Only on Monthly Payment
A lower monthly payment on a longer term means more total interest. A $2,000/month payment for 10 years costs $240,000. A $4,000/month payment for 3 years costs $144,000. The "more affordable" option costs $96,000 more.
Mistake 4: Forgetting Existing Debt
Your new loan payment does not exist in isolation. Stack it on top of every existing obligation -- rent, payroll, existing loans, credit card minimums -- to see the true monthly burden.
Mistake 5: Not Accounting for Fees
A $200,000 loan with a 3% origination fee nets you $194,000 in actual proceeds but obligates you to repay $200,000 plus interest. Your effective rate is higher than the stated rate.
Frequently Asked Questions
For APR-based loans, use the amortization formula: P × [r(1+r)^n] / [(1+r)^n - 1], where P is the principal, r is the monthly rate (APR divided by 12), and n is the number of payments. For factor-rate products, multiply the loan amount by the factor rate and divide by the number of payments. Our guide above walks through complete examples of both calculations.
SBA loans currently range from 10-13% APR -- the best available rates. Online term loans range from 15-30% APR for well-qualified borrowers. Revenue-based products range from 25-60% APR equivalent. A "good" rate is relative to your bankability profile and the product type. Compare offers within the same product category, not across categories.
A factor rate is a decimal multiplied by your loan amount to determine total repayment. A 1.30 factor on $100,000 means you repay $130,000. Unlike APR, factor rates do not account for repayment timeline or compounding. The same factor rate costs more (annualized) on shorter terms. Always convert to APR equivalent using our conversion table above for accurate comparison.
Total business debt service should not exceed 25-30% of gross monthly revenue. This includes all loan payments, not just the new one. If your business generates $50,000/month, your combined debt payments should stay below $12,500-$15,000/month. Stress-test against your lowest-revenue month to ensure sustainability.
For APR-based loans (SBA, bank, most term loans), yes -- less interest accrues on a lower balance. For factor-rate products (MCAs, most revenue-based financing), usually no -- the total cost is fixed at origination regardless of when you pay. Some lenders offer early payoff discounts, but this must be stated in the agreement. Always ask about prepayment terms before signing.