EGF’s Top Picks: Calculating the True Cost of a Small Business Loan

True Cost of a Small Business Loan

Deciding on a lender for your small business can be overwhelming, especially considering the number of lenders that provide this type of financing. When evaluating your loan options, it’s important to be aware of all factors that go into calculating the true cost of taking on debt.  Many small business owners consider a loan’s interest rate to be the biggest selling point in how affordable a loan will be, but interest rates alone don’t tell the whole story.

Looking at a loan’s annual percentage rate (APR) and amortization schedule will provide a more detailed assessment of how much the loan will cost over time. We’ve compiled three resources to help you make the best decision for your business when looking for your next loan. 

1. Nav’s Term Loan APR Calculator

You’ve seen APR advertised on loans for credit cards, cars, mortgages and more, but do you know what it really represents? APR is the annual rate charged for borrowing, taking into account the loan’s interest rate, fees, and the length of repayment.  Given the varying terms offered by each lender, the APR provides an “apples to apples” comparison for consumers, filling in the gaps of information on how much a loan will truly cost.

Nav’s Term Loan APR Calculator allows you to compare the APRs of loans and provides definitions of important terms used by lenders. To use the tool you will need the following information:

  • Loan amount

  • Interest Rate

  • Origination & Application Fees

  • Loan Term (In Months)

  • Monthly Servicing Charges

If this information isn’t readily available or provided to you, this can be a red flag that you’re dealing with a predatory lender.  

2. Amortization Schedule Calculator

In simple terms, amortization is defined as the paying off of an obligation, such as a loan, gradually. An amortization schedule can show you what your monthly payment will be for a loan, and how it can change based on the interest rate and length of repayment. Having an idea of what your monthly payments will be allows you to make an informed decision that leaves you with enough available cash flow or “wiggle room” to pay your bills and reinvest profits into your business.

This amortization schedule calculator provides an estimate of your monthly payments as well as a breakdown on how much of each payment goes toward principle and interest.

To use this tool, enter the following and then go to the “Amortization Schedule” tab:

  • Loan Amount

  • Loan Term

  • Interest Rate

  • Location

3. Excelsior Growth Fund’s True Cost of a Business Term Loan Infographic

If you want a more in-depth understanding of how the cost of debt is determined, Excelsior Growth Fund’s (EGF) has created an infographic on how to calculate the true cost of a business loan. This infographic will walk you through the necessary steps of the process, including how to calculate a loan’s origination fee.

In addition to the infographic, EGF provides further details on small business lender options such as Community Development Financial Institutions (CDFIs) and “Community Advantage” lenders. You’ll also learn more about the various fees and penalties most commonly used for business loans to better prepare you for a conversation with a lender. 

Determining the true cost of a debt is an important step to take before moving forward with a small business loan. With these tools and resources, you’ll have a more complete picture when evaluating your options. If you need further assistance in preparing for a loan application, contact EGF’s Business Advisory Services team.