Business Loan Calculator

Origination fee = amount borrowed × fee rate. Total cost of credit = total interest + origination fee. Net proceeds = amount borrowed − origination fee.

P

Amount borrowed, as written in the loan agreement

r

Monthly interest rate: the annual rate divided by twelve

n

Number of monthly payments

f

Origination fee as a percentage of the amount borrowed

I

Total interest paid over the term

N

Net proceeds: what actually reaches your account at closing

Use it as soon as you have a term sheet rather than a rate, because a term sheet is where the fee lives. Two offers with the same headline rate and different fees are not the same offer, and on a loan of a year or two the fee can be the larger of the two costs; comparing rates alone will pick the wrong one. Put the fee at 0 first to see the loan as the rate alone describes it, then enter the real fee and watch how much of the total cost it accounts for — the last column of the chart below does that division for you. The other thing to do with this page is check the net proceeds against your actual need: if you need 100,000 and the fee is 2%, borrowing 100,000 does not get you there. Ask what you have to sign for to net what you need, and note that the fee then applies to the larger figure as well.

1. 100,000 at 9% over five years, 2% origination fee

   1. Monthly rate: 9 ÷ 12 = 0.75% a month, or 0.0075 as a decimal
   2. Payment: 100,000 at 0.75% over 60 months = 2,075.84 a month
   3. Paid in total: 2,075.84 × 60 = 124,550.08, so the interest is 24,550.08
   4. Origination fee at 2%: 100,000 × 2% = 2,000
   5. Total cost of credit: 24,550.08 + 2,000 = 26,550.08
   6. Net proceeds: 100,000 − 2,000 = 98,000
   7. Cost per 100 borrowed: 26,550.08 ÷ 100,000 × 100 = 26.55

   The default. The fee is 2,000 against 24,550.08 of interest, so on a five-year loan it is about 7.5% of the cost of the money — noticeable, but not the main event. Compare this with the next example, where the same fee is charged over a single year.

2. The same amount over one year at a 4% fee

   1. Payment: 100,000 at 0.75% over 12 months = 8,745.15 a month
   2. Interest over the year: 4,941.77
   3. Origination fee at 4%: 4,000, charged once on the full amount
   4. Total cost of credit: 4,941.77 + 4,000 = 8,941.77
   5. Net proceeds: 96,000
   6. Cost per 100 borrowed: 8.94

   The point of this page. Twice the fee rate on a fifth of the term produces a fee that is four fifths of the interest: 4,000 against 4,941.77. Interest is charged on a balance that is falling towards zero, while the fee is charged on the amount you signed for on the first day, and short terms are where that difference stops being a rounding error.

3. Two million over seven years with a 1.5% fee

   1. Monthly rate: 8 ÷ 12 = 0.666667%
   2. Payment: 2,000,000 at 0.666667% over 84 months = 31,172.43 a month
   3. Interest over the term: 618,484.03
   4. Origination fee at 1.5%: 30,000, taken out of the advance
   5. Total cost of credit: 618,484.03 + 30,000 = 648,484.03
   6. Net proceeds: 1,970,000
   7. Cost per 100 borrowed: 32.42

   A commercial-scale loan, where a fee rate that sounds small is a large number in absolute terms: 1.5% is 30,000, only a little less than one month's payment. Long terms dilute the fee — it is under 5% of the cost of credit here — but the amount taken out of the advance is the number a borrower has to plan around.

This page prices one fee and one loan, and a commercial facility usually has more of both. Fees other than the origination fee are absent: guarantee fees, account maintenance charges, annual facility fees, drawdown fees and prepayment penalties are all real and none are modelled, and because they are charged on different bases — per year, per draw, per event — they cannot be folded into the single percentage field here. The rate is fixed for the whole term, so a loan priced off a fluctuating benchmark, or one with a fixed period followed by a floating period, is not represented; run the page separately for each rate regime. Interest is calculated monthly on a monthly balance, which is the common shape but not the only one: facilities that charge interest on an average daily balance, or that require interest-only payments followed by amortisation, will differ. Nothing here accounts for tax — in most jurisdictions business loan interest is a deductible expense and fees may be deductible or amortisable depending on local rules, and the after-tax cost of the loan is generally lower than the figures above. Nothing here accounts for the use of the money either, which is the only thing that makes a business loan worth its cost. Finally, the amounts carry no currency: 100,000 is 100,000 in whatever unit you typed, and if you are comparing offers in different currencies you are comparing two different interest rate environments.

What is an origination fee and why does it matter?

It is a charge the lender takes for making the loan, expressed as a percentage of the amount borrowed and normally deducted from the advance at closing. It matters because it is charged on the full amount on day one while interest is charged on a balance that falls every month, so on a short loan the fee can be a large fraction of the entire cost of the money.

Why does the fee hurt more on a short loan?

Because interest has less time to accumulate while the fee does not shrink at all. On 100,000 at 9%, a 4% fee over twelve months is 4,000 against 4,941.77 of interest; over sixty months a 2% fee is 2,000 against 24,550.08. Same principal, and the fee goes from four fifths of the cost to under a tenth of it.

Should I compare loans by their interest rate?

Not on its own, and not when the terms differ. Two offers at the same rate with different fees are different offers, and if one runs for twelve months and the other for sixty, the rate is almost the less important of the two numbers. Compare the total cost of credit column and the cost per 100 borrowed, then look at the term separately.

How do I borrow enough to cover the fee?

Divide what you need by one minus the fee rate. If you need 100,000 and the fee is 2%, ask for 100,000 ÷ 0.98 = 102,040.82, which nets you the 100,000 after a fee of 2,040.82. The fee applies to the larger figure, which is why this is a division rather than an addition — adding 2% to what you need leaves you short.

Is the interest on a business loan tax deductible?

In most jurisdictions interest on money borrowed for business purposes is deductible against business income, and loan fees are often deductible or spread over the life of the loan. The rules differ by country and by the size and type of the business, so the figures on this page are the before-tax cost; your after-tax cost is generally lower, and by how much depends on your own position.

What other costs should I expect?

Commonly: a guarantee fee if the loan is backed by a government programme, an annual or monthly facility fee, a charge for each drawdown on a revolving line, and a prepayment penalty if you clear the balance early. Ask for the full fee schedule in writing before signing, then subtract the ones that apply from the interest saving if you are considering early repayment.

• 13 CFR Part 120 — Business Loans: the United States regulation governing the SBA's loan programmes, including the fees a lender may charge a borrower — Electronic Code of Federal Regulations, Office of the Federal Register (United States)
• Publication 535 — Business Expenses: how business interest is treated for tax, and which loan-related costs are deductible in the year they are paid — Internal Revenue Service (United States)