How to compare business loan offers

Why business loans are hard to compare

Consumer loans in the US come with a standardized APR under the Truth in Lending Act. Business loans don’t. A lender can quote you a rate, a “simple interest” rate, a factor rate, or just a payback amount, and put fees in the headline, in the fine print, or deducted from the funds. Two offers that look similar can differ by thousands of dollars.

The fix is to reduce every offer to the same three facts, then measure them the same way.

Step 1: Get the three numbers that matter

For each offer, get these in writing:

1. The money you’ll actually receive. The loan amount minus every fee deducted before funding: origination, underwriting, packaging, documentation, wire or UCC filing fees.
2. Everything you’ll repay. Each payment’s amount, how often it’s due (monthly, weekly, every business day), and how many there are. Add any balloon, and any fees added to the balance.
3. Any costs outside the schedule. Prepayment penalties, required insurance, or a payment due at closing.

If a lender won’t give you the net funding amount and the full schedule, treat that as a warning. In states with commercial financing disclosure laws, providers generally must disclose these figures before you sign.

Step 2: Put each offer on the same schedule basis

Translate each quote into its payment schedule:

• Interest rate (amortizing): payment = amount × r ÷ (1 − (1 + r)⁻ⁿ), where r is the rate per period.
• Flat or “simple” interest: interest = amount × rate × years, charged on the original amount for the whole term; payment = (amount + interest) ÷ number of payments.
• Total to repay or factor rate: payment = payback ÷ number of payments.

Our loan comparison calculator does this translation for you.

Step 3: Compare two measures, not one

• Total cost = everything you repay − the money you received. This is the dollar price of the loan.
• APR = the annual rate at which the payments repay the money you received, by the actuarial method in Regulation Z Appendix J. This is the price per year, so it’s fair between loans of different lengths.

You need both, and you need to know which question you’re asking. We’ll see why below.

Worked example: three offers for $100,000

A vs. B: the fee trap. B has the lower rate and the lower payment, but its $6,000 fee means you receive $4,000 less while repaying almost as much. B costs $2,579.50 more than A, and its APR is 1.27 points higher. If you’d compared headline rates, you’d have picked the more expensive loan.

A vs. C: cost vs. rate. C has the highest APR, 12%, yet the lowest total cost, $12,976.33, because you’re paying interest for only two years instead of five. But its payment is $4,707.35 a month, more than twice A’s.

Which is better? If the business can comfortably carry the larger payment, C is cheaper in dollars. If cash flow is tight, A spreads the cost out, and you might invest the monthly difference in something that earns more than 8.36%. Neither measure alone gives the answer, but together they frame the decision.

The flat-interest trap

Some short-term lenders quote a flat or “simple” rate. Here’s $50,000 for a year, repaid weekly, at 12% quoted two ways:

Flat interest charges 12% on the full $50,000 for the whole year, even though by mid-year you’ve repaid half of it. The result costs nearly twice as much, and the APR is almost double the quoted rate. A flat rate is roughly half the APR it represents on a loan repaid evenly over its term.

Daily and weekly payment loans

Short-term online loans and merchant cash advances often use weekly or daily payments with a fixed payback. Suppose a lender offers $100,000 with $118,000 repaid in 78 weekly payments (18 months). The payment is $1,512.82 and the cost $18,000, which sounds like “18%”. The estimated APR is 22.46%, because you’re repaying from the first week.

Frequent payments also change your cash flow: a weekly or daily debit leaves less buffer between payments than a monthly one, even at the same annual rate.

A checklist before you choose

• I have the net funding amount for each offer, after every upfront fee.
• I have the full payment schedule for each: amount, frequency, count, and any balloon.
• I’ve converted every offer to an APR and a total cost on the same basis.
• I know the prepayment terms: can I save interest by paying early, or is there a penalty or fixed payback?
• I’ve checked the payment against my slowest normal month, not my average one.
• I know whether the rate is fixed or variable, and what happens to the payment if rates rise.
• I’ve asked about collateral, personal guarantees and default terms, which don’t show in the price but matter if things go wrong.

Where disclosure laws help

California and New York require an estimated APR on many small commercial financing offers. Florida, Georgia, Utah, Virginia, Connecticut, Kansas, Missouri and Texas require cost disclosures, such as the total repayment and finance charge, but not an APR. Coverage depends on the product and the deal size. See our state disclosure summaries for the details and what each law covers.

Even where an APR is disclosed, it’s worth recomputing it yourself from the numbers above. A disclosure is only as good as the assumptions behind it, especially for sales-based products where the term depends on a forecast.

Common questions

Is a lower payment a better deal? Not necessarily. A lower payment usually means a longer term, which often means more total interest.

Should I include fees I pay in cash at closing? Yes. Treat any fee you pay to get the loan as reducing the money you receive, whether it’s deducted or paid separately.

What about SBA loans? They follow the same logic, with an upfront guaranty fee on the guaranteed portion. Our SBA 7(a) calculator builds that fee in.