Factors that affect your small business loan payments
The amount you can afford to spend on monthly business loan payments will play a role in how much you can afford to borrow. With that in mind, it’s important to understand how the loan’s principal, interest rate and repayment terms can affect your monthly payment, which can help you stay within your budget.
While we’ve laid out this information for you below, it’s a good idea to decide what monthly business loan payment you can afford before applying for funding. This will make it much easier to stick to an amount that works in your budget.
As a rule of thumb, business loan payments rely on a number of factors, such as:
Business loan amount
Average business loan amounts range from $13,000 to more than $1 million, depending on the lender. Banks and other traditional financial institutions are typically known to loan larger amounts compared to alternative business lenders, like online providers. That said, it can sometimes be easier to qualify for an online loan than a bank loan.
The type of business loan you’re seeking would also affect the amount. For instance, U.S. Small Business Administration (SBA) loans are available up to $5 million, and equipment loan amounts could be as high as $500,000 to $1 million. The size of the business expense that you need to cover can also help determine the type of loan you could pursue.
Interest rate
Business loan interest rates affect the overall cost of business loans and will vary from lender to lender. You may come across several types of interest rates as well. Some common forms of interest on business loans include:
- Annual percentage rate (APR): APR is a form of compounding annual interest that includes fees, such as loan origination fees and closing costs.
- Annual interest rate (AIR): In contrast, AIR is compounding annual interest that does not include any loan fees.
- Factor rate: A factor rate is a decimal figure that shows the total cost of financing when multiplied by the original loan amount. It doesn’t reflect any loan fees.
The interest rate you’re offered largely depends on the strength of your financial profile as a borrower. Lenders will likely assess your personal credit score as well as your business credit score, if applicable, and your business’s financial standing to determine how likely you are to be able to repay the loan. The amount of time you’ve been in business and your annual revenue may also be factors as well.
When taking out a business loan, make sure you understand if the rate is variable or fixed for the entire loan term. This information should be outlined in your final business loan agreement. Looking at the loan’s amortization schedule is helpful in estimating how long it will take to pay off your loan based on a specific interest rate and monthly payment.
Common types of business loan fees
If the loan’s interest rate is expressed as an APR, there may be several fees included in the calculation of the rate. Even if that’s not the case, you may still have to pay some of these fees at the start or end of your loan term.
Common types of business loan fees include:
- Origination fee: An origination fee covers the cost of processing and approving your loan application.
- Service or processing fees: These fees cover expenses for ongoing administrative tasks, such as billing and managing your account.
- Prepayment penalty: A prepayment penalty is a fee some lenders charge in exchange for allowing you to pay off your loan early.
- Late payment fee: Late fees are charged when you make a payment after the due date.
Check with your lender to see what fees they charge and to get more information on when and how those fees should be paid. In some cases, your fees could be included in your monthly business loan payments. Alternatively, you may be expected to pay fees in addition to your recurring payments.
Loan term
The length of your loan term illustrates how long you have to repay your debt in full. Terms can span a few months to several years, depending on the type of loan and lender. SBA loans often have the longest maximum terms, ranging from 10 to 25 years. Traditional term loans are close behind, as terms may be as long as 10 years.
Online business loans typically have the shortest terms, and you may have to repay the debt in as few as a few months. These loans also typically come with higher interest rates than bank loans. Keep in mind that since you may have a short timeline to repay your loan plus interest, the size of your monthly payments may increase.
Thing to know: Watch out for daily or weekly repayment schedules when borrowing short-term business loans. Some lenders collect automatic, recurring payments on a daily or weekly basis until the loan is paid off. While this may result in lower payments overall, you would need to budget for regular withdrawals from your business bank account.
