Why use this calculator
Business lending is priced and structured very differently from a home loan, and the differences are what catch owners out. Rates are higher because the security is weaker, establishment fees are real money charged at drawdown, and many lenders debit weekly rather than monthly, which quietly increases the effective cost and, more importantly, changes the cash flow pattern your business has to survive.
Interest-only facilities make the early months look comfortable and leave the entire principal owing in one lump at the end. This calculator puts all of that in one place so you can see the repayment your cash flow actually has to carry, the total interest across the facility, and whether the structure on offer leaves you with a refinancing problem in three years.
The interest cost per year is the figure to compare against the additional profit the borrowed money is expected to generate, because a loan is only worth taking when that comparison is favourable.
How to use it
- Enter the amount you are actually drawing rather than the facility limit if the two differ, since interest is charged on what you draw.
- Take the interest rate from the lender's letter of offer, not the advertised range, because business rates are risk priced and the number you are offered often sits well above the headline.
- Set the term to match the useful life of whatever the money is buying, so equipment expected to last five years is not financed over ten.
- Choose the repayment structure the offer specifies, either principal and interest or interest only.
- Set the repayment frequency to whatever the direct debit schedule says, because many business lenders debit weekly and that changes both the payment and the total.
- Finally add the application, documentation, valuation and security registration fees as establishment fees, since these are charged at drawdown and belong in the cost of the loan.
What each result means
- Repayment
- What leaves the business account each period. This is the figure your cash flow forecast has to absorb every single time.
- Yearly cash needed to service the loan
- Every repayment due in a year added together. The business must generate at least this much spare cash after its running costs, or the loan is paid from your own pocket.
- Effective rate including the fee
- The yearly interest rate once the establishment fee is counted as a cost, because you repay the full amount but receive it less the fee. Use it to compare loans with different fees on a like for like basis.
- Repayments a year
- How many times the direct debit runs annually. Weekly debits are common in business lending and tighten working capital.
- Total interest
- The full cost of borrowing across the facility. On a term loan the early payments are mostly interest, not principal.
- Total repaid including fees
- Every dollar the facility costs you, including the establishment fees charged at drawdown.
- Principal still owing at the end
- Zero on a term loan. On an interest-only facility this is the lump sum you must refinance or repay.
- Interest cost a year
- The annual cost of the debt, which is the number to compare against the additional profit the borrowing generates.
- Interest per $1,000 borrowed
- A size-neutral way to compare two offers with different amounts, terms or fee structures.
- Interest as a share of the loan
- Total interest as a percentage of what you borrowed. It rises steeply with the term, not just the rate.
The formula
The rate for one period = annual rate divided by the number of repayments a year, which is 12 monthly, 26 fortnightly or 52 weekly
Number of periods = years multiplied by that same figure
For a term loan the repayment uses the standard amortisation formula, where payment equals principal multiplied by (period rate multiplied by (1 plus period rate) to the power of the number of periods) divided by ((1 plus period rate) to the power of the number of periods, minus 1), and total interest equals payment multiplied by periods, minus the principal. For an interest-only facility the repayment equals principal multiplied by the period rate, total interest equals that payment multiplied by the number of periods, and the whole principal remains owing at the end.
Total repaid = principal plus total interest plus establishment fees
How this number is used in practice
The right test for a business loan is not whether you can afford the repayment but whether the borrowed money earns more than it costs. A 150,000 dollar machine financed at roughly 38,000 dollars of interest over five years has to generate more than that in additional gross profit, after the cost of running it, before the deal makes sense.
Owners routinely get this backwards and judge the loan by whether the monthly figure fits the current bank balance, which is how a business ends up servicing debt from working capital rather than from the returns the debt was meant to create. Write down the expected uplift in profit before you sign, then check it against the interest cost a year.
Repayment frequency deserves more attention than it usually gets. Weekly debits suit businesses with weekly receipts, such as hospitality and retail, and are punishing for a business paid on thirty or sixty day terms, where a weekly debit runs for eight weeks before the invoice funding it is even paid.
If your receivables are slow, negotiate monthly repayments or arrange a facility whose timing matches your cash conversion cycle. It is one of the few terms a lender will often flex on, and it costs nothing to ask.
Interest-only facilities are a legitimate tool and a common trap. They suit genuinely temporary needs such as bridging a property settlement or funding a seasonal inventory build that will be sold and converted back to cash. They are dangerous when used simply to make an unaffordable loan look affordable, because the principal does not shrink and the refinance at the end depends on your financials and the credit market at that future moment, neither of which you control.
If you take an interest-only facility, put the principal repayment aside as if it were a term loan, or have a written plan for the exit before drawdown.
Worked examples
A 150,000 dollar equipment loan at 9.45 per cent over five years, repaid monthly
3,144.27 dollars a month, 38,656 dollars of total interest and 190,156 dollars repaid including fees
The same loan debited weekly instead of monthly
724.93 dollars a week and 38,482 dollars of interest, a slightly lower total but a tighter weekly cash flow
A 150,000 dollar interest-only working capital facility at 9.45 per cent for three years
1,181.25 dollars a month, 42,525 dollars of interest and the full 150,000 dollars still owing at the end
When people use it
- Costing an equipment purchase before committing to a supplier order
- Comparing two lender offers with different rates, fees and repayment frequencies
- Testing whether a weekly debit schedule fits the business cash conversion cycle
- Deciding between an interest-only facility and a term loan for working capital
- Checking that the annual interest cost is smaller than the profit the borrowing will generate
Tips
- Compare offers on total repaid including fees, not on the advertised rate. Establishment fees can outweigh a difference of half a per cent.
- Match the loan term to the useful life of the asset. Financing a three year asset over seven years means paying for something you no longer own.
- Ask for the repayment frequency that matches your receipts. Weekly debits punish businesses paid on thirty day terms.
- If you take an interest-only facility, set aside the principal anyway so the lump sum at the end is not a crisis.
- Check for ongoing line fees and account keeping fees, which are not in the interest rate and can add hundreds a month on a large facility.
- Read the covenants before signing. A minimum trading ratio or a director guarantee can matter far more than the rate you negotiated.
What it assumes, and where it stops being accurate
- Assumes a fixed rate for the whole term with level repayments. Most business facilities are variable and will reprice.
- Excludes ongoing account keeping, line and monitoring fees, which many commercial facilities charge monthly or annually.
- Excludes the tax deductibility of business loan interest, which reduces the true cost for a profitable business and varies by jurisdiction.
- Assumes the full amount is drawn on day one. A line of credit charges interest only on the drawn balance, so the cost will be lower.
- Excludes break costs and early repayment fees, which apply to many fixed rate commercial facilities.
- Assumes no redraw, no additional repayments and no covenant breach. A covenant breach can reprice or accelerate the facility entirely.
- Excludes any security costs such as valuations, personal guarantees or director guarantees beyond the establishment fee entered.
Terms used on this page
- Term loan
- A loan repaid in level instalments of principal and interest over a fixed period.
- Interest-only facility
- A loan where repayments cover interest only, leaving the full principal owing at the end.
- Establishment fee
- An upfront charge for setting up the facility, covering application, documentation and security registration.
- Line fee
- An ongoing charge levied on the facility limit rather than the drawn balance, common on commercial lines of credit.
- Covenant
- A condition in the loan agreement, such as a minimum trading ratio, that can trigger repricing or default if breached.
- Personal guarantee
- A promise by a director to repay the company's debt personally if the business cannot.
Questions people ask
- Why are business loan rates higher than home loan rates?
- Because the security is weaker and the default risk is higher. A home loan is secured by residential property that is easy to value and sell, while business lending is often secured by equipment, receivables or nothing at all. Lenders price that risk, which is why unsecured business facilities can carry double digit rates.
- When does an interest-only facility make sense?
- When the need is genuinely temporary and there is a defined exit, such as bridging a property settlement, funding a seasonal inventory build, or carrying a project until milestone payments arrive. It stops making sense the moment it is being used to make an unaffordable loan look affordable.
- Is business loan interest tax deductible?
- In most jurisdictions interest on borrowings used for business purposes is deductible, while the principal repayment is not. Establishment fees are usually deductible over the shorter of five years or the loan term. The rules vary, so confirm the treatment with your accountant or the revenue authority before relying on it.
- Does repaying weekly save money?
- Slightly, because principal reduces sooner and less interest accrues between payments. The saving is modest, typically well under one per cent of the total. The bigger consideration is whether weekly debits match your receipts, since a mismatch creates a working capital squeeze no rate saving can offset.
- Should I use a term loan or an overdraft?
- Use a term loan for a defined purchase with a known life, such as equipment or a fit-out, because the structure forces repayment. Use an overdraft or line of credit for fluctuating working capital, since you pay interest only on what is drawn. Using an overdraft to fund a capital purchase is a common and expensive error.
- What is a personal guarantee and should I give one?
- A personal guarantee makes you personally liable for the company's debt, so the lender can pursue your own assets if the business cannot pay. Most small business lending requires one. It is often unavoidable, but understand that it removes the protection of the company structure for that specific debt.
Use this with
Business Loan Calculator answers one part of the question. These pick up where it stops: Loan Repayment Calculator, Break-Even Calculator, Cash Flow Forecast Calculator and Merchant Cash Advance Calculator.
Where these figures come from
This calculation is jurisdiction-neutral arithmetic. No country-specific rules are applied.
- business.gov.au - finance and funding. Australian government guidance on business finance options
- US Small Business Administration - loans. US guidance on business loan programmes and terms
- MoneySmart - Loans and credit. Comparison rate and fee disclosure guidance
Business Loan Calculator produces an estimate for general information. It is not financial, tax, medical, legal or engineering advice. read the full disclaimer. Spotted a wrong number? Report it and it gets fixed. The form picks up this calculator and the inputs you used.