How to turn an application and repayment offer into one annual cost

Two offers arrive. One quotes a rate. One quotes a monthly payment. One quotes a total you will repay. None of them can be compared to the others in the form they arrive in.

This page is about the conversion work: turning any financing offer into a single figure you can set beside any other, then reading the documents that determine what happens after you sign.

What to take away

The payment is not the price

Shopping on the payment is the most reliable way to be sold expensive money. A payment depends on the amount, the cost, and the length of time; any one can move to make it look better.

Stretching the term lowers the payment and raises the total. Splitting a monthly payment into daily debits makes each one small and leaves the cost unchanged.

Shop on total cost of capital: every dollar that leaves your business because you borrowed, expressed against what you actually received and over the time you actually have it.

Building the number

Do this for every offer, from the documents rather than from a summary or a phone call.

1. What lands in your account. Not the approved amount: the disbursed amount. Origination, packaging, underwriting, and closing fees are often deducted before funding. If they are, you owe on a figure larger than the one you received, and the difference is real cost.

2. What leaves your account. Add up every scheduled payment over the full term, plus any fee charged along the way that is not part of the payment.

3. The difference is the cost in dollars. Everything else is arithmetic on those two numbers.

4. Divide the cost by what you received. This gives you the cost as a proportion of the money you actually got to use.

5. Scale it to a year. Multiply by a year divided by the length of the term. This gives a rough annualized cost, comparable across products that quote themselves in different ways. For an amortizing loan it understates the true rate, because the balance falls each month. Use it for sorting, then calculate the true rate as shown below.

6. Note whether the cost is time-based or fixed. On an amortizing loan, cost accrues on the outstanding balance, so repaying early genuinely reduces it. On a flat-fee or factor-priced product, the cost is set on day one and repaying early saves nothing while compressing the same cost into less time. This distinction changes what your options are later, so record it now. How a declining balance behaves month by month, and why the split between principal and interest in a fixed payment shifts over time, is set out in term loans.

The number that comes out of step five is not exact and does not have to be. It is a sorting tool. Two offers that land in the same range require a closer look at the terms; two offers a wide distance apart have already answered your question.

A worked example, from start to finish

Take an illustrative offer: a $100,000 term loan, a 2% origination fee deducted at funding, and 48 monthly payments of $2,500. The figures are invented to show the method, not drawn from any lender.

Step 1: the business receives $100,000 minus the $2,000 fee, which is $98,000.

Step 2: the payments total 48 times $2,500, which is $120,000.

Step 3: the cost in dollars is $120,000 minus $98,000, which is $22,000.

Step 4: $22,000 divided by $98,000 is about 22.4% of the money received.

Step 5: over a four-year term, the simple scaling gives about 5.6% a year. That figure is too low, because the business repays principal each month and does not keep the full $98,000 for four years.

To find the true annual rate, solve for the monthly rate that makes the 48 payments of $2,500 equal $98,000 today. For this offer that rate is about 0.86% a month, or about 10.3% a year before compounding. A spreadsheet can find it with the RATE function: 48 payments, the $2,500 payment and the $98,000 received entered with opposite signs, and zero for the future value. Compare offers on that figure, not on step five.

Lenders' annual rate figures and the law

Many lenders show an annual percentage rate (APR). In US consumer lending, the Truth in Lending Act and its Regulation Z require APR disclosure. Those rules generally do not cover business-purpose credit, so a business loan may show no APR at all. Ask for the annual rate on the amounts received anyway, and ask how it was calculated.

The fees that sit outside the quoted rate

A quoted rate almost never includes everything. Ask specifically about each of these and get the answer in writing. Not all apply to every product; the ones that do not apply should be confirmed as not applying rather than assumed away.

Put each figure you are quoted into steps 1 and 2 above before you compare totals. A fee you cannot quantify is a fee you cannot compare.

The prepayment line deserves particular attention because it interacts with step six above. Where cost is time-based, a prepayment penalty is what stops you from capturing the saving. Where cost is fixed, there is no saving to capture and any early-termination charge is pure additional cost.

Daily repayment changes everything

Products that debit daily or weekly rather than monthly behave differently in ways the cost figure alone does not show.

The term compresses. Daily collection retires an obligation faster than monthly collection of the same total. On a fixed-cost product, that raises the annualized cost. Run your conversion using the real number of days, not a nominal term.

For example, a merchant cash advance of $50,000 with a factor rate of 1.30 repays $65,000. If that is repaid over six months, the cost is $15,000 on $50,000, or 30% over half a year, which is 60% on a simple annual basis. Daily debits need a daily cash-flow calculation to find the true rate, so treat 60% as a starting point. (Illustrative figures.)

Your buffer disappears. A monthly payment lets you manage a bad week and catch up. Daily debits give you no room to sequence. The money leaves before you have decided what the week's priorities are.

The timing mismatch bites. If your receipts arrive in lumps (a large customer paying on terms, a seasonal peak, a project milestone), and your debits arrive every day, you are covering a smooth outflow with a jagged inflow. That gap is filled from working capital, and if working capital runs short the usual remedy on offer is more expensive financing.

Before accepting a daily-repayment product, calculate the debits against your worst recent month rather than your average one. See merchant cash advances for the version of this that carries the most risk.

What you sign at closing

The pricing conversation ends at closing; the obligations begin there. These are the provisions that determine what a difficult year actually does to you.

Personal guarantee. You promise to pay the debt personally if the business does not. This removes the separation between business and personal liability that the entity was created to provide. Establish four things: whether it is unlimited or capped; whether it is joint and several with other owners, meaning the lender can pursue any one guarantor for the whole amount rather than each for a share; whether a spouse is being asked to sign, which reaches jointly held assets; and what, if anything, releases it. Guarantees can survive the sale of the business and outlive the loan they were signed for.

Blanket lien. A UCC-1 financing statement filed under Article 9 of the Uniform Commercial Code, covering all business assets rather than a specific one. Its practical effects: it is publicly searchable, it complicates or blocks later financing while it stands, it covers assets acquired after the filing, and it typically requires a UCC-3 termination once the debt is repaid. Ask who files the termination and confirm later that it happened. A stale lien on your record is a common and avoidable obstacle.

Cross-default and cross-collateralization. Whether a default elsewhere triggers a default here, and whether collateral pledged for one obligation also secures another. Both turn a contained problem into a general one.

Covenants and reporting. What you must deliver and when: financial statements, tax returns, insurance certificates, receivables reports. What you must maintain: ratios, minimum balances, insurance coverage. What you must not do without consent: additional debt, asset sales, ownership changes, distributions. A covenant breach can be an event of default even if you have never missed a payment.

Acceleration and cure. Whether default makes the whole balance due, and whether you have a defined period to fix a breach before that happens.

Confession of judgment, fee-shifting, arbitration, and venue. What legal recourse you retain, who pays for a dispute, and where it happens. A confession of judgment lets the lender obtain a judgment without a court hearing, and some states restrict or ban it. Check your state's rule before signing.

Have a lawyer read anything with a confession of judgment in it, and read the guarantee yourself regardless of who else reviews the file.

Preparing the application

Better preparation buys better terms more reliably than better negotiation does. Assemble the file before you approach anyone.

Check your business and personal credit files before anyone else does, and correct errors first. See loans by credit profile requirements for what lenders look for, and loans by credit profile for how a weaker file shows up in the terms rather than in a yes or no.

Life after the money arrives

The rule that survives every product

The cheapest financing you can actually qualify for is almost always the right choice. Speed, convenience, and light documentation are real benefits and they are priced accordingly. Pay for them when the timing genuinely creates value (a discounted purchase, a contract you would otherwise lose), and not because a faster offer arrived first while a cheaper one was still available. For what a line of credit costs once the fees are counted, see line of credit costs.

One test belongs beside that rule. Run the repayment schedule against your worst recent trading period rather than your average one, because a shape that fits an annual figure can be impossible in a particular month. Measuring the cycle that decides this is covered in loans by industry.

For general background, the SBA's frequently asked questions about small business finance and the FDIC's Money Smart for Small Business cover financing basics without selling anything. For current pricing, terms, and eligibility, go to lenders directly, because those change constantly and no guide can hold them.

Common questions

Which single number should I compare offers on?

The true annual rate on the amounts received, built from what actually reached your account and everything that leaves it. Never the payment, and never a quoted rate on its own.

Does repaying early save money?

On an amortizing product, yes, unless a prepayment penalty removes the benefit. On a flat-fee or factor-priced product, no: the cost is fixed at the start and early repayment raises the annualized figure.

What does a personal guarantee actually expose?

Your personal assets, to the extent the guarantee is unlimited, and jointly held assets if a spouse signs. Establish the cap, the release conditions, and whether it is joint and several before signing.

Is a blanket lien negotiable?

Sometimes it can be narrowed to specific collateral, and it is worth asking. What matters more is knowing it is there, understanding that it will affect later financing, and confirming it is terminated once the debt is cleared.