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Business Loan Costs Explained
The stated interest rate is rarely the full cost. Origination fees, packaging fees, and guarantee fees (for SBA loans) all add to your effective APR. A $100,000 loan at 8.5% with a 2% origination fee effectively costs 9.1–9.5% APR depending on term length.
Monthly Payment = P × [r(1+r)^n] ÷ [(1+r)^n − 1]
where P = principal, r = monthly rate, n = number of payments
Total Interest = (Monthly Payment × n) − Principal
Total Cost = Principal + Total Interest + Origination Fee
Effective APR = Solved via IRR on net proceeds vs payment schedule
where P = principal, r = monthly rate, n = number of payments
Total Interest = (Monthly Payment × n) − Principal
Total Cost = Principal + Total Interest + Origination Fee
Effective APR = Solved via IRR on net proceeds vs payment schedule
Business Loan Rate Benchmarks (2025)
- SBA 7(a) loans (up to $5M): Prime + 2.75–4.75% = ~10.5–13% current rates
- SBA 504 loans (real estate/equipment): Fixed rates ~6–7% (Treasury-linked)
- Bank term loans (strong credit): 6–10% for established businesses with 3+ years history
- Online lenders (Bluevine, Kabbage): 15–30%+ — convenient but expensive
- Merchant cash advances: Factor rates of 1.1–1.5× = effective APR of 40–150%+. Avoid.
What interest rate should I expect for a business loan?
Rate depends on: (1) Business age — lenders want 2+ years in business; startups pay 20%+ or use SBA microloans. (2) Credit score — 700+ personal and business scores unlock best rates; below 650 severely limits options. (3) Revenue and cash flow — lenders want DSCR (Debt Service Coverage Ratio) of 1.25× or higher — meaning income is 1.25× your total debt payments. (4) Loan type — SBA loans are government-guaranteed and offer the best rates for qualifying businesses. For a healthy business (3+ years, $500K+ revenue, 700+ credit), expect 7–11% on a bank term loan or 10–13% on SBA 7(a). Shop at least 3 lenders.
Should I pay off my business loan early?
It depends on your after-tax cost of debt vs your capital ROI. If your loan is at 9% and you can invest that cash in your business at 25%+ ROI (new equipment, marketing, inventory), deploy the cash — don't pay down the loan early. However, if cash is sitting idle at 5% in a money market account and the loan costs 9–12%, paying it down earns a guaranteed 4–7% spread — better than most risk-free investments. Also check for prepayment penalties, which are common on SBA loans (3/2/1% fee in years 1/2/3). The break-even point: paying down early makes sense when your loan rate exceeds your risk-adjusted return on capital deployed in the business.