Why use this calculator
Business financing comes in many forms, and understanding the true cost of a business loan is critical for maintaining healthy cash flow. This calculator lets you compare term loans (principal and interest) with interest-only loans, helping you choose the right structure for your business needs. Whether you are funding equipment, expansion, or working capital, knowing your exact repayment obligations is essential for sound financial planning.
How to use it
Enter the loan amount, annual interest rate, and loan term. Select whether you want a standard term loan (which pays down principal over time) or an interest-only loan (which has lower monthly payments but requires a lump sum repayment at the end). Compare both options to find the best fit for your cash flow.
The formula
Term Loan: M = P x [r(1+r)^n] / [(1+r)^n - 1]. Interest Only: Monthly Payment = P x r (monthly rate). Total Interest (IO) = Monthly Interest x Number of Months. The principal is repaid in full at the end of an interest-only loan.
Worked examples
$100,000 term loan at 8% for 5 years
Monthly payment of $2,027.64 with $21,658.47 total interest
$100,000 interest-only at 8% for 5 years
Monthly payment of $666.67 but $40,000 total interest plus $100,000 principal due at end
When people use it
- Comparing financing options for business equipment purchases
- Planning cash flow for a new business venture
- Evaluating the cost of working capital loans
- Deciding between term and interest-only structures for expansion funding
Tips
- Interest-only loans have lower monthly payments but cost more in total interest
- Business loan interest is generally tax-deductible as a business expense
- Consider your business cash flow cycle when choosing loan terms
- Shop around - business loan rates vary significantly between lenders
Questions people ask
- When should I choose interest-only?
- Interest-only loans suit businesses that need to maximise short-term cash flow, expect a large future payment (like a property sale), or are in a growth phase where capital is better deployed in the business than in loan repayments.
- Can I switch from interest-only to principal and interest?
- Many lenders allow you to switch from interest-only to P&I repayments after the initial interest-only period. Some business loans automatically convert after 1-5 years of interest-only payments.
- Are business loan rates higher than home loan rates?
- Generally yes. Business loans typically carry higher interest rates than home loans due to greater perceived risk. Rates vary based on the security offered, business financials, and the purpose of the loan.