The total amount of money you borrow may depend on the size of payments you can afford to repay your loan. It may be best to calculate your desired monthly payment before applying for funding to see what works with your budget. Small 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 are known to loan larger amounts compared to alternative, online business lenders. But, it may be easier to qualify for an online loan than a bank loan.
The type of business loan you’re seeking would also impact the amount. For instance, the 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. Whether you need to cover a small or large business expense would determine the type of loan you’d pursue.
Interest rates affect the overall cost of business loans and 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): Compounding annual interest that includes fees, such as loan origination fees and closing costs.
- Annual interest rate (AIR): Compounding annual interest that does not include any loan fees.
- Factor rate: Decimal figure that shows the total cost of financing when multiplied by the original loan amount. A factor rate does not reflect any loan fees.
Whether your interest rate is high or low depends on how risky you are as a borrower. A lender would assess your personal credit score, as well as your business credit score, if applicable, and your business’s financial standing to determine your risk level. The amount of time you’ve been in business and your annual revenue may be factors as well.
When taking out a business loan, make sure you understand if your rate is variable or fixed for the length of the loan. This should be outlined in your final loan agreement. You can use a business loan amortization calculator to estimate how long it may take to pay down your loan based on a specific interest rate and monthly payment.
Types of business loan fees
If your interest rate is expressed as APR, there may be several fees wrapped up in your rate. But if not, you may pay these fees at the start or end of your loan term. Common types of business loan fees include:
- Origination fee: Covers the cost of processing and approving your loan application.
- Service or processing fees: Covers the expense of activities such as billing and managing your account.
- Prepayment penalty: Paying off your loan early may result in a prepayment penalty.
- Late payment fee: Charged when you make a payment past the due date.
Check with your lender to see when and how you would be expected to pay these fees. In some cases, fees could affect your monthly loan payments. Other times, you may be expected to pay fees in addition to your recurring payments.
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 bank loans are close behind, as terms may be as long as 10 years.
Online loans typically have the shortest terms. You may have to repay debt in as few as three months. These loans usually come with higher interest rates than bank loans. Keep in mind that you may have a short timeline to repay your loan plus interest, which could increase the amount of your monthly payments.