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How to Calculate the Cost of a Business Loan

How to Calculate the Cost of a Business Loan | Moula Good Business

Not sure how much your business can afford to borrow? Here’s exactly what you need to look for in your loan terms and rates.

Regardless of whether you’re an established business or have only been operating a short time, getting a business loan is a big financial decision and shouldn’t be taken lightly.

There are many kinds of business loans and lenders, each with different rates and fee structures, making it tricky to compare costs. We’re going to break down each aspect of your loan and what you need to look for to help you calculate costs.

How Much Does a Business Loan Actually Cost?

The cost of a business loan will vary a lot depending on the lender you go to as well as the actual type of loan you apply for. If a business loan is less risky for a lender, such as when it is secured against property or assets, it will often have lower interest rates. More flexible loans, like short-term loans and lines of credit, or unsecured loans tend to come with higher rates.

When calculating the total cost of your loan you need to take into account three main factors: the principal, the total interest, and any fees associated with the loan. This will give you the basic ‘total cost’ of the loan – the amount you will be paying back to the lender over the course of your loan. You can use tools like a business loan calculator to help you calculate this total cost.

However, trying to compare different loan products with different terms and structures can get a bit tricky. Annualised Percentage Rate (APR) is a good way to compare rates equally across multiple lenders.

Sneaky Fees to Watch Out For

Fees can trick people into paying more than they expected. As a borrower you should keep your eyes peeled for the little asterisks and closely follow it down to the fine print. Headline rates can mislead and suggest interest rates are lower than they actually are. Additional fees can add up.

Different lenders may also charge different fees for their own products. These are some of the most common types of fees:

  • Establishment/Origination/Application Fee: Called a few different things, this is the fee to cover the cost of setting up the loan or account.
  • Documentation Fee: This fee covers the production of documentation and the time spent preparing your file.
  • Direct Debit Fees: Many lenders will charge you a small direct debit fee every time a repayment transaction is made. This is usually a small fee which builds up. If you’re making daily or weekly repayments, this could potentially cost hundreds, or potentially thousands, of dollars over the lifetime of the loan.
  • Monthly Fees: Some lenders will have ongoing monthly fees for the management of your loan.
  • Annual Fees: Business accounts or credit cards usually come with annual fees to cover the administration of your credit account. These fees vary according to your card type and its features.
  • Withdrawal Fee: This one is more for Lines of Credit and even some Overdrafts.
  • Electronic Transaction Fee: This fee is charged when you transfer money electronically.
  • Late Payment Fee: A pretty standard fee that is charged for late payments. Most lenders have some sort of late fee and you usually have five days after the due date before this fee is levied.
  • Early Repayment Fee: This is a big one. Many lenders will advertise that they don’t have any early repayment fees, however, you will still be charged the interest you would have paid over the life of the loan.
  • Amendment Fees: Your lender may charge fees if you request changes to your loan agreement, for example, if you wanted to extend the loan period or decrease monthly payments.

At Moula, we don’t believe in hidden fees. With other lenders, these are the main fees to watch out for. Make sure you know exactly how much these fees amount to, as well as how often they will be charged, before committing to a loan contract.

What to Keep In Mind When Calculating and Comparing

APR is probably the best tool to use when comparing different kinds of small business loans across different terms and lenders. This will give you a standard rate that you can then use to compare costs of loans. However, keep in mind that the loan term will greatly affect APR, especially with short-term loans.

The shorter the loan term the higher the APR will be, but you will actually end up paying less overall for the loan. For example, at Moula a $100,000 unsecured business loan at our standard interest rate over 12 months will cost $114,059. If you take the same loan at the same rate but change it to a 6-month term, the loan will cost $107,139. The APR will stay about the same and you will end up paying half the amount in interest, however, your loan repayments will be much higher. As a general rule, the shorter your loan term, the higher your regular repayments will be (but the lower the overall cost of the loan).

When calculating the ‘cost’ of your loan it’s important to take into account all of these things and weigh them against why you need the loan and what it is being used for. If you only need a quick injection of cash and can handle the high repayments, the shorter term will be fine. If you need lower repayments, you can spread the loan out longer to make it more manageable – just be aware you will be paying more in the long run.


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