When it comes down to it, business loan costs depend on a number of factors—the loan amount, the interest rate, the repayment schedule—and of course, the type of loan product and the lender.
This being said, however, a small business loan amount from an online lender can range from as low as $2,500 to as high as $500,000. Interest rates can range as well—from as low as 7% to as high as 80%. Therefore, the amount of financing you qualify for and the amount it ultimately costs truly depends on what kind of business loan you’re applying to and how qualified your business is.
So, how much is a small business loan really? Which ones are most affordable, and which ones should you try to avoid if possible?
In this guide, we’ll explain how much a business loan costs—discuss the factors that go into the overall cost of a loan, as well as break down typical costs product by product.
How much is a small business loan? | Costs summarized
Of all the factors that go into determining the overall cost of a small business loan, one of the biggest factors is the type of business loan you’re talking about.
From traditional term loans to merchant cash advances, there are a variety of ways to finance your business. For an overview, you can refer to the cost chart below to find out exactly how much a small business loan will cost, product by product.
Weekly, bi-monthly, or monthly
As long as it takes your customer to pay the invoice
Invoice financing company collects the fees you owe once your customer pays the invoice
Merchant cash advances (MCAs)
Automatically deducted through your merchant account until you’ve repaid in full
What determines the cost of a business loan?
In order to truly answer the question, “how much is a business loan,” it’s important to understand the different cost factors that contribute to the overall cost of a financial product.
Of course, as we mentioned above, the type of financial product you choose will play a role in cost; however, other factors—namely interest rates and fees—will play a significant role as well.
After all, if you’re looking for a $50,000 loan, the total cost will be much higher if your interest rate is 20% than if it’s 7%.
This being said, these cost factors will vary both based on your business’s qualifications—i.e., the better your qualifications, the lower your interest rate will be—as well as the way the lender operates—i.e., some lenders are more likely to charge higher interest rates or additional fees.
With this in mind, let’s break down the most common factors and how they contribute to the overall cost of business financing.
As we mentioned, interest rate is one of the most influential factors in the overall cost of a business loan.
The interest rate you receive will depend on the type of product, lender, and your business’s qualifications. Again, as we mentioned, the lower the interest rate, the lower the cost of the loan.
This being said, however, it’s important to note that not all business loan interest rates are quoted the same way—with the most notable difference between a simple interest rate and APR.
A simple interest rate is the amount (expressed as a percentage) that a lender will charge on the principal (the loan amount) for your use of the funds. In contrast to APR, a simple interest rate only represents the amount you’ll be charged for borrowing the capital—it does not include any other fees a lender might charge (which will explain in more detail below).
Therefore, because an APR incorporates simple interest as well as additional fees, this percentage is a much more accurate reflection of how much a business loan will actually cost you.
Depending on the lender you’re working with and the type of business loan you’re applying to, you might face a variety of different fees on top of your simple interest rate.
These fees can range from as little as 1% of the loan amount to as high as 5% or more.
Overall, these fees can significantly increase the total cost of your business loan—which, once again, is why it’s important to distinguish a simple business loan interest rate from its APR. The APR will show a clearer picture of how much the business loan will actually cost you.
How much is an SBA loan?
Now that you have a better sense of the factors that contribute to business loan costs, let’s explore the typical costs of different loan products.
Starting with one of the most affordable loan products out there, the rate on an SBA loan typically ranges from 7% to 8% APR.
Why is the APR on these loans so low?
In short, SBA loans are so affordable for two major reasons: First, they’re loans issued from a bank—and bank loans are some of the most affordable financing products available. Second, the SBA’s guarantee on the loan encourages bank lenders to lend to small businesses at lower interest rates (because they have less risk in doing so).
SBA loan rates
When it comes down to it, the cost of an SBA loan is made up of a few different elements.
First, the SBA loan rate you receive is determined by the current prime rate, plus an allowable spread of rates that is designated by the bank lender you’re working with. However, that bank is subject to a maximum rate they’re allowed to charge on top of the prime rate.
For the SBA’s most popular loan product, the 7(a) loan, a lender can charge no more than 2.25% on top of the prime rate for loans with terms of less than seven years. For 7(a) loans with terms longer than seven years, the most a lender can charge on top of the prime rate is 2.75%.
This being said, however, the reason SBA loans generally have a 7% to 8% APR (not just around 6.5%), is because the SBA does charge at least one fee for guaranteeing the loan that’s usually passed onto the borrower.
The actual percentage that you’re charged in an SBA guarantee fee depends on the loan’s maturity and the amount the SBA actually guarantees. If your SBA loan is less than $150,000, you won’t have to pay a guarantee fee.
For an SBA loan that’s more than $150,000, with a maturity of one year or shorter, the guarantee fee will be 0.25% of the portion guaranteed. Loans between $150,000 and $700,000 with terms of more than one year will have a guarantee fee of 3% of the guaranteed portion. Finally, SBA loans of $700,000 or more will have a guarantee fee of 3.5% of the guaranteed portion.
All in all, therefore, when it comes to the APR of SBA loans, you’ll typically see about 7% to 8%. This, of course, can vary based on the SBA loan program, your lender, and your business’s qualifications.
How much is a medium-term loan?
Overall, a medium-term loan from an online lender ranges from 8% to 30% APR.
Luckily, when it comes to the cost of this type of business term loan, things are pretty straightforward.
In almost every case, a medium-term loan will come with a fixed interest rate that gets charged on the principal of the loan amount. Additionally, with most medium-term loans, you’ll pay the lender back with fixed monthly payments.
Your repayment to the medium-term lender will, again, not only include interest repayments but also any fees the lender charges.
Medium-term loans from online lenders are, in structure, most comparable to traditional term loans you get from a bank. The rates on a medium-term loan, however, are a little higher than what you’d find at a bank.
Medium-term loan rates
Although medium-term loans are some of the most affordable financing products on the market, they’re still a little more expensive than what you’d find at a bank or with an SBA loan.
This is largely due to two factors.
First, whereas banks have notoriously tight credit for small business owners (only lending to the most qualified borrowers), online lenders offering medium-term loans will work with less-qualified borrowers.
Therefore, because medium-term lenders will work with slightly less qualified borrowers, they’ll charge a slightly higher interest rate. This slight increase in what they charge in interest rate compensates for the fact that they’re lending to riskier borrowers.
In the absolute worst case you can’t pay back your loan, the lender has already gotten a fair amount of the money they lent back from the higher interest payments.
Additionally, another reason why medium-term loans have slightly higher rates is due to the time it takes for a medium-term lender to fund your loan.
Whereas a bank takes a long time to fund (a few weeks to a few months), online or alternative lenders use technology to fund loans much more quickly—sometimes within a few days. As you might expect, you pay for this speed with higher interest rates on the loan.
How much is a business line of credit?
The wide range of costs for business lines of credit comes from the fact that there are two variations on a general business line of credit: a short-term line of credit and a medium-term line of credit.
Like medium-term loans and short-term loans, medium-term lines of credit typically have repayment periods of 12 to 18 months or longer, whereas short-term lines of credit have repayment periods of less than a year.
Business line of credit rates
This being said, as you might expect, medium-term lines of credit are comparable to medium-term business loans in that they’ll have large capital amounts, a lower interest rate (starting at 8% APR), and a slightly longer time to funding.
Short-term lines of credit, on the other hand, are like short-term loans in that they offer fast, more accessible capital, but they’ll come with higher interest rates (up to 80% APR for short-term lines of credit)
Additionally, it’s worth noting that the rates you see for a business line of credit don’t function exactly the same as a term loan. Whereas you’re charged interest on the total loan amount with a term loan, you’re only charged interest on the funds that you draw from your business line of credit.
Similarly, you might see slightly different fees included in the cost of a line of credit. Some lenders charge a draw fee every time you draw on your credit line, some charge a penalty fee if you don’t draw from your line within a certain period of time, and some charge monthly fees to keep your account active.
How much is a short-term loan?
As we briefly mentioned above, short-term loans are more costly than their medium- or longer-term counterparts. Rates for these loans start at around 10% APR, but they can reach triple digits.
Overall, the reasons that short-term loans can become so expensive are similar to why medium-term loans are more expensive than bank loans.
First, like medium-term lenders, short-term, online lenders are more likely to work with less qualified borrowers and they justify this risk with higher interest rates. Additionally, short-term loans are typically one of the fastest forms of financing—and as we mentioned, the faster a product is to fund, the more expensive it’s likely to be.
Short-term loan rates
Ultimately, short-term loan rates will be quoted much in the same way as any other term loan.
On the other hand, these loans must be paid back over a much shorter time frame (anywhere from three to 18 months) with either daily or weekly payments. This shorter term means that each payment will be sizable in comparison to those that you’ll find with an SBA or long-term loan.
Moreover, it’s worth mentioning that, although many short-term loans will be quoted with simple interest rates or APR, some lenders quote the cost of the loan as a factor rate (like 1.2).
This being said, a factor rate is simply a multiplier that tells you the total amount you’ll pay the lender back. As an example, say you were quoted a factor rate of 1.35 on a $10,000 short-term loan over a 12-month term. The total amount you’d repay, therefore, is $13,500 ($10,000 x 1.35).
In this case, although it looks like your interest rate is 35%, factor rates do not convert to interest rates in this way.
With interest, the cost is 35% of the total loan amount—but with factor rates, all of the interest is charged to the principal when the loan or advance is originated—unlike a loan quoted with APR, where interest accrues on the principal amount as it gets smaller and smaller as more payments are made.
How much is invoice financing?
At the end of the day, the cost of invoice financing comes out to about a 10% to 65% APR. However, there are nuances to the cost structure of this financing product.
With invoice financing, an invoice financing or factoring company advances you a percentage of the value of your outstanding invoice—usually around 85%.
As an example, therefore, let’s say you have a $100,000 outstanding invoice.
The financing company will advance you $85,000, holding the remaining $15,000 in reserve. Some invoice financing companies will charge a processing fee (usually around 3%) on the reserve amount right away.
Now, you wait for your customer to pay their invoice (while you use the advanced cash for your business). Every week that it takes your customer to pay their invoice, the invoice financing company will charge what’s usually called a “factor fee” on the reserve they’re holding—in this case, the $15,000 reserve.
So, say your customer pays the invoice in two weeks, and the invoice factoring company was charging a 1% factor fee each week. In this example, they will then take 2% of the total invoice amount, or $2,000, in factor fees. When you get the remaining reserve back, you’ll end up with $10,000 after the company takes the 2% in factor fees and 3% in a processing fee.
In this way, the cost of invoice financing is simply a convenience cost you need to pay in exchange for the advance of capital you’re receiving.
How much is equipment financing?
With equipment financing, like invoice financing, you’re receiving capital for a specific purpose—to purchase equipment.
In this case, because an equipment financing company is loaning you money to purchase the equipment, you’ll be paying more to finance that equipment than you would be if you were to pay for it out of pocket. The tradeoff makes sense, however, if you can’t afford that kind of large expense or don’t want to deplete your cash storage with such a large purchase.
This being said, the APR range on equipment financing varies from 8% to 30%, with your actual rate depending on the equipment you’re buying and your qualifications.
Other than that, the cost structure of equipment financing is pretty straightforward—mirroring that of a traditional term loan.
As an example, say an equipment financing company offers you an equipment loan of $10,000 at a rate of 12% over a three-year term.
With a 12% APR, your $10,000 piece of equipment will end up costing you $11,957.15 all together (with monthly payments of $332.14).
How much is a merchant cash advance?
Finally, of all the business loan products we’ve discussed, the merchant cash advance (MCA) will be the most expensive.
APRs for a merchant cash advance can reach as high as triple digits—and therefore, you should consider any and all options you have before opting for an MCA.
Merchant cash advances are often so expensive because these companies work with less qualified borrowers and charge a factor rate—which can be misleading when it comes to the total cost.
Let’s consider an example:
Say you’re advanced $40,000 with a factor rate of 1.20.
Using your factor rate formula, take $40,000 multiplied by 1.20—$4,800. This amount is what you’ll pay the merchant cash advance company back by allowing them to take a fixed percentage of your daily credit card sales.
This is where factor rates can be confusing—at first glance, you might think that your interest rate is 20%—but you have to convert the factor rate into APR.
Say that, in this example, you’re allowing the merchant cash advance company to take 20% of your future credit card sales, and you expect to bring in $45,000 a month in credit card transactions.
This being said, you’d repay your merchant cash advance in 160 days with daily payments of $300—meaning, at the end of the day, your merchant cash advance held a steep 85.43% APR.
Therefore, once again, merchant cash advances should be a last resort when it comes to business financing. Along these lines, before you take on an MCA, you’ll want to use a merchant cash advance calculator to determine how much this loan product will actually cost and whether or not your business can afford it.
The bottom line
As you can see, the answer to “how much is a small business loan” varies based on the type of financing product—among other factors.
Although we’ve listed the APR ranges you’re most likely to see, the APR you’re quoted at will depend on the lender you’re working with, as well as your business’s qualifications.
Ultimately, when you’re looking for debt financing, you want to ensure that you understand any and all costs that your business will face through the borrowing process. In this way, the right loan product for your business is not only the one that will best meet your needs but also one that you can afford.
Therefore, you’ll always want to compare different options to make sure you’re getting the lowest rate possible on your financing.
This article originally appeared on Fundera, a subsidiary of NerdWallet.