How do you calculate the interest rate on a small business loan?

If you are looking for a small business loan, you may wonder how to calculate the interest rate that you will have to pay. The interest rate is the percentage of the loan amount that you pay to the lender as the cost of borrowing. The interest rate can vary depending on several factors, such as the type of loan, the loan term, the loan amount, the lender, and your credit score. In this article, we will explain how to calculate the interest rate on a small business loan using two common methods: the annual percentage rate (APR) and the factor rate.

1 APR Method

The APR is the most widely used method to calculate the interest rate on a small business loan. The APR reflects the total cost of borrowing, including the interest rate and any fees or charges that the lender may impose. The APR is expressed as a yearly percentage of the loan amount. To calculate the APR, you need to know the following information: the loan amount, the interest rate, the loan term, and the fees. You can use an online calculator or a formula to find the APR. The formula is:

APR = (Total Interest + Fees) / Loan Amount / (Loan Term / 365) x 100

For example, if you borrow $10,000 for one year at an interest rate of 12% and pay a $200 origination fee, the APR is:

APR = ($1,200 + $200) / $10,000 / (365 / 365) x 100

APR = 14%

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Betty Speaks

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Actually, Here’s what you need to calculate the total cost of a business loan: Loan amount. The total amount of capital your business borrows. Repayment term. The time it takes (in months) to repay the loan. For the most part, annual percentage rate. The annual cost of the loan that includes interest and fees.

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2 Factor Rate Method

The factor rate is another method to calculate the interest rate on a small business loan, especially for short-term loans or merchant cash advances. The factor rate is a decimal number that represents the multiplier that the lender applies to the loan amount to determine the total repayment amount. The factor rate does not include any fees or charges that the lender may impose. To calculate the factor rate, you need to know the following information: the loan amount, the total repayment amount, and the loan term. You can use an online calculator or a formula to find the factor rate. The formula is:

Factor Rate = Total Repayment Amount / Loan Amount

For example, if you borrow $10,000 for six months and have to repay $12,000, the factor rate is:

Factor Rate = $12,000 / $10,000

Factor Rate = 1.2

To convert the factor rate to an APR, you need to use another formula:

APR = (Factor Rate - 1) / (Loan Term / 365) x 100

For example, if the factor rate is 1.2 and the loan term is six months, the APR is:

APR = (1.2 - 1) / (180 / 365) x 100

APR = 48.65%

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Yogesh Pusarla

Driving Product Innovation and Operational Excellence | Expertise in Full Product Lifecycle Management, Cross-Functional Leadership, & Machine Learning Integration in Retail and Logistics
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This is a checklist when you need to take a loan as a small business - 1. Know Your Loan Terms: Identify the loan amount and annual interest rate. 2. Consider Additional Fees: Check for any extra fees associated with the loan. 3. Convert Annual Rate: - If compounded more frequently than annually, convert the annual rate to a periodic rate (e.g., monthly). 4. Calculate Interest for Each Period: - Use the periodic rate to find the interest for each period using the formula: `Interest = Principal × Rate × Time`. 5. Include Additional Fees: - Add any extra fees to the total interest. 6. Calculate APR: - Express the total cost (interest + fees) as an annual percentage of the loan amount.

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3 Comparing Interest Rates

Comparing interest rates can help you find the best deal for your small business loan. However, you need to make sure that you are comparing apples to apples. Different lenders may use different methods to calculate the interest rate, and they may also charge different fees or charges. Therefore, you need to look at the APR, not just the interest rate or the factor rate, to compare the true cost of borrowing. The APR can help you compare the annualized cost of different loans, regardless of their type, term, or amount.

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4 Negotiating Interest Rates

Negotiating interest rates can help you save money and reduce your debt burden. However, not all lenders are willing to negotiate, and not all borrowers are eligible to negotiate. To negotiate interest rates, you need to have a strong credit score, a solid business plan, a good cash flow, and a clear repayment strategy. You also need to do some research and shop around for different loan options. You can use your research as leverage to ask for a lower interest rate from your preferred lender. You can also ask for a lower fee, a longer term, or a more flexible repayment schedule.

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5 Improving Interest Rates

Improving interest rates can help you improve your financial health and increase your profitability. However, improving interest rates is not a quick or easy process. It requires time, effort, and discipline. To improve interest rates, you need to improve your credit score, your business performance, and your relationship with your lender. You can improve your credit score by paying your bills on time, reducing your debt, and checking your credit report for errors. You can improve your business performance by increasing your revenue, reducing your expenses, and managing your cash flow. You can improve your relationship with your lender by communicating regularly, providing updated financial information, and repaying your loan as agreed.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you calculate the interest rate on a small business loan?

1

2

3

4

5

6

1 APR Method

2 Factor Rate Method

3 Comparing Interest Rates

4 Negotiating Interest Rates

5 Improving Interest Rates

6 Here’s what else to consider

Small Business

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How do you calculate the interest rate on a small business loan?

1

2

3

4

5

6

1 APR Method

2 Factor Rate Method

3 Comparing Interest Rates

4 Negotiating Interest Rates

5 Improving Interest Rates

6 Here’s what else to consider

Small Business

Rate this article

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