When your business is looking to secure a small business loan, the last thing you want to do is pay exorbitant fees and penalties just to borrow working capital. Unfortunately, however, this is the reality for many small business owners that need funding to expand their business, refinance their debt, or simply see their way out of an emergency.

We believe that taking out a loan should always be a cost-effective solution. That’s why we’ve made the process of mastering all the minute aspects of business loans more manageable. From choosing the right loan, to the application process, to calculating its true cost, we’ve got you covered.

If you’re wondering “how much is a business loan,” read on and discover everything there is to know about loan costs and how to pay it back on time, without penalties or fees. This way, you can grow your business without harming its financial health in the long run.

The True Cost of a Small Business Loan

On average, small business loans have an annual percentage rate (APR) of roughly 7 percent. In other words, one would assume that your standard business loan cost is the principal amount borrowed from the creditor, with a 7 percent fee added on top.

However, there are several factors that influence the cost of business loan over time, including the type of loan in question. For instance, if you agree to give your lender an equity stake in your company in exchange for a sum of working capital, then the long-term cost of the loan can potentially be astronomical.

No matter what, a small business loan is never free of charge. In business as in life, there is no such thing as a so-called free lunch. Universally, the borrower of a loan will have to either pay interest on regular repayments of the loan or sacrifice partial ownership of the company itself. Either way, the amount borrowed comes at a cost.

To understand just how much a small business loan could truly cost you, using a business loan calculator is one of the best tools you could use.

Cost by Loan Type

To help you get the full picture when it comes to figuring out how much is a business loan, we broke down each category of business loan below. Since each type of loan comes with specific terms and conditions, what you can expect to pay in exchange for the capital varies between them.

Long-Term Business Loan

Businesses with an established credit history should consider seeking out a long-term business loan if they need operating capital over several years. If you want to refinance your existing debt or scale your company’s operations over a span of a decade or more, you may want to consider this relatively low-cost financing option.

  • Loan Amount: $10,0000 – $2,000,000
  • Loan Term: 1 – 5 Years
  • Interest Rate: Starting at 7%
  • Speed of Funding: As fast as 1 day
  • Repayments: Monthly, bi-monthly, and weekly

Short-Term Business Loan

Alternatively, businesses that only need working capital on an interim basis should consider a short-term business loan from a bank or credit union. These loans are often repaid in a year or less, but they come at a higher cost than regular medium or long-term financing options.

  • Loan Amount: $3,000 – $500,000
  • Loan Term: 3 – 18 months
  • Interest Rate: Starting at 10%
  • Speed of Funding:  Fast as same day
  • Repayments: Bi-weekly, weekly, and daily

SBA Loan

SBA loans are guaranteed by the US Small Business Administration, which makes them easier to qualify for than most other private term bank loans. One of the main benefits of taking out an SBA loan is that you will never have to guarantee the loan in your name. Instead, a federal agency backs the loan, which makes the private lender have more confidence in its ability to me repaid.

In other words, SBA loans make it safer for banks to issue low-interest loans, and in doing so they make loans more accessible for small businesses. For loans worth up to $150 thousand, the US SBA guarantees 85% of them, which makes issuing the loan a virtually risk-free endeavor for the lender. Typically, the SBA is the final arbiter regarding whether the loan is approved or denied.

  • Loan Amount: $5,000 – $5,000,000
  • Loan Term: 5 – 25 years
  • Interest Rate: Starting at 6%
  • Speed of Funding:  Fast as 30 days
  • Repayments: Monthly, bi-weekly, weekly, and daily

Business Line of Credit

For many borrowers, business lines of credit offer a degree of both convenience and flexibility unmatched by regular term loans. Basically, lines of credit allow borrowers to take only as much money as they need until they reach their predetermined credit limit. Therefore, if a business needs a flexible solution to finance capital projects, a business line of credit is a great option.

There are several key advantages to using a business line of credit over other loans or sources of credit, including:

  • Lower interest rates than credit cards
  • Perfect medium between term loan and credit card
  • Superior cash flow management
  • Good for emergency fund reserves
  • Can be borrowed as needed

It’s not uncommon for creditors to reserve business lines of credit for borrowers with a proven track record when it comes to paying back debts. However, business owners can sometimes get a co-signer to go in on the loan with them in case of a default, which can improve one’s chances of getting approved.

  • Loan Amount: $5,000 – $500,000
  • Loan Term: 6 months – 3 years
  • Interest Rate: Starting at 8%
  • Speed of Funding:  Fast as 1 day
  • Repayments: Monthly, bi-monthly, weekly, and daily

Invoice Financing

Invoice financing is a more convoluted form of borrowing in which businesses borrow against the invoices due from their clients. In other words, the creditor buys the rights to the invoice proceeds, pays the sum upfront in the form of a loan, and then requires repayment plus interest in the form of a fee.

This form of business financing can help improve a business’s cash flow management when resources are scarce in the short run. Invoice financing is also a more accessible form of borrowing when other options are off the table.

  • Advance Amount: Up to 80% of receivables
  • Estimated Repayment Term: 3 months – 18 months
  • Factor Rate: Starting at 1.05
  • Speed of Funding:  Fast as same day
  • Repayments: Lender collects repayment once client pays invoice

Equipment Financing

Some industries require massive equipment expenditures to get up and running, including everything from production line manufacturing to dental and medical clinics. To help finance these up-front investments, equipment financing options can provide you with the capital needed to make these purchases on flexible and customizable terms.

  • Loan Amount: Up to 100% of equipment value
  • Loan Term: 1 – 5 years
  • Interest Rate: Starting at 8%
  • Speed of Funding:  Fast as same day
  • Repayments: Monthly, weekly, and daily

Understanding Interest

Whenever we’re asked, “how much is a small business loan,” our first suggestion is to look at the APR. In blunt terms, a loan’s APR is the total price of the loan expressed in the form of an interest rate. However, APR alone only contains information about the base cost of the loan and does not account for extra fees such as:

Origination fees

The fee charged for processing a borrower’s information during the application approval process; usually percentage-based.

Loan processing fees

The fee charged on an annual or monthly basis to cover the administrative processes such as customer service, over the lifetime of the loan.

Late payment fees

A flat fee charged when a loan payment is made past its due date.

Documentation fees

A common fee that is applied on top of invoice factoring loans.

Prepayment penalties

A small fee charged when a borrower makes an early or pre-authorized payment on the loan.

With the help of a business loan repayment calculator, you can get a sense for what the loan truly costs once all fees and costs are added into the equation. In other words, just because you see that your SBA loan has a 7 or 8 percent APR, this doesn’t necessarily mean that it’s “low cost.”

Business Loan Calculator

Knowing the interest rates on business loan types is not enough to fully understand the cost of a loan. For your convenience, several business loan calculators exist online to help you develop a rough estimate of what a loan costs over its lifetime.

Since the cost of a business loan can have drastic consequences for your business’s financial health in the long run, we recommend always using an SBA loan payment calculator and other free financial tools to find out the true cost of a loan.

When you use a business loan calculator how much can I borrow is a question that is answered in plain terms. For instance, a regular business term loan of $225 thousand over three years at an interest of 8.5 percent beginning in December 2019 would, according to a repayment calculator, be paid off in November 2022 with a monthly payment of $7,103.

Always pay attention to the “Total Interest Paid” section of a loan repayment calculator, as this tells you how much you paid beyond the principal of the loan. For the example above, the borrower would have paid over $30 thousand in interest alone. Once you factor in fees on top, it’s clear that the loan was more expensive than its low APR might have you assume.

Making Your Business Loan Affordable

To find out how much is a business loan, we suggest trusting a business loan repayment calculator. This way, you can discover how long it would take to repay the loan, what you pay in fees, and how much total interest you will pay over the lifetime of the loan.

Before you agree to a loan, compare the calculated total cost of each loan offer to see which is priced the lowest—this is one of the most effective ways to keep your business loans affordable.