Business loan and interest rate calculator
What to know about business loans
A business loan is money that you borrow specifically to grow or maintain your business. Starting and running a business can be very expensive, especially in the face of rising inflation. Business loans are ideal for small businesses that need help starting or growing their business. They are ideal for both expansion and large, one-time expenses. You can also use a business loan to consolidate debt if needed.
The cost of a business loan is determined by four factors:
- Principal: The total amount your business borrows.
- Interest: The cost of borrowing a business loan.
- APR (annual percentage rate): The annual cost of a loan expressed as a percentage. The APR includes both interest and fees.
- Loan term: The time it takes to pay back the loan.
A business loan could help your business succeed, but you should only consider taking one out if you are sure you can afford to pay it back. Before applying for a business loan, ensure you have the necessary documents. These generally include personal and business credit reports as well as financial and legal documents.
What if my loan uses a factor rate?
Factor rates are expressed as a decimal rather than a percentage, but like APRs, factor rates include both interest and fees. Lenders will multiply the factor rate by the principal to determine how much you pay back.
For example, if you have a factor rate of 1.3 on a loan of $10,000, your business will pay back $13,000 — the original $10,000 and $3,000 in fees.
A factor rate is typically assessed on short-term business loans like merchant cash advances. These tend to cost more and have shorter repayment periods but are available to businesses with poor credit.
Types of business lenders
Business loans are offered by banks (both traditional and online), credit unions and online lenders — although the amounts and repayment period vary widely among options.
Bank loans are generally best suited for business owners with an established banking relationship. Online lenders, such as financial services companies, tend to be a better option for newer businesses and those with poor credit. Because of the variety of online lenders, more lending options and flexible repayment terms exist.
Types of business loans
There are countless options out there, but these are the most common types of business loans.
- Installment loan: Installment loans — also known as term loans — allow your business to borrow a lump sum and pay it back in monthly payments. These are one of the most common options, and you can find them offered by both banks and online lenders.
- Line of credit: A business line of credit functions like a credit card. You can draw funds from it as needed and only pay interest on what you borrow. As you pay back what you’ve borrowed, your credit limit resets and you can borrow more as needed.
- Commercial real estate loan: If your business is ready to open a brick-and-mortar location, a commercial real estate loan gives you the funding to buy property or sign a leasee.
- Equipment loan: Equipment loans are term loans secured by the equipment your business needs to buy. Because the equipment acts as collateral, they tend to have lower rates than unsecured installment loans.
- SBA loan: The SBA (Small Business Administration) backs loans for businesses. While it doesn’t offer loans itself, it can help your business qualify for lower rates and better repayment terms. The SBA backs term loans, commercial real estate loans and other ways to borrow to expand your business.
What to consider when shopping for a business loan
Before taking out a loan, consider your business needs and the total cost of borrowing.
- Assess your business’s overall financial picture to give you a better idea of what you may be able to qualify for — and what type of loan would best suit your needs.
- Compare lenders to find the lowest possible rate. But you should also consider borrowing limits, fees, eligibility requirements and funding speed.
- Apply for pre-approval to see what terms and rates you are eligible for before committing. Some lenders will let you pre-qualify without hurting your credit.
Alternatives to fund your business
- Personal loans are generally easier to qualify for but may have higher rates and shorter repayment terms. And while many can be used for business expenses, not all lenders allow it — so check the fine print before you apply.
- Business grants are awarded to certain types of businesses, like those owned by veterans, racial minorities and women. You don’t have to pay back what you receive, but grants are extremely competitive and involve a lengthy application process.
- Home equity loans can be used for business expenses, but this should be a last resort. If you have a lot of equity in your home, this option could give you quick access to the cash you need. However, using a home equity loan puts you at risk of losing your home if you are unable to pay it back.
- Business credit cards allow you to borrow what you need when you need it up to a credit limit. Credit cards also may come with perks like rewards programs, sign-up bonuses and an introductory period with 0 percent APR.
Get answers with Bankrate.com
Particularly with small business loans, interest rates should be reasonable to help the borrower protect his bottom line. Find out what the experts recommend for getting great rates on small business loans and lines of credit.