To compare business loan offers fairly, convert every offer to the same two numbers: total dollars repaid and an estimated APR. A term loan quotes an interest rate, a line of credit quotes a rate plus draw fees, and a merchant cash advance quotes a factor rate that looks small but converts to a triple-digit APR. Until you translate them into one common language, you are comparing offers that are deliberately written to look different. The fastest way to put a term-loan or line-of-credit offer into dollars is the business loan calculator; for the trickier factor-rate offers, the math below shows exactly how to convert them.
This guide gives you a repeatable method: restate each offer as total cost, convert a factor rate into an annual percentage rate, fold separate origination and packaging fees into a true APR, and then line the offers up side by side. Every figure below is recomputed so you can follow the arithmetic yourself. One framing note that separates this from consumer borrowing: judge a business offer by whether the financed activity earns more than the loan costs, not by any personal tax angle, since business loan interest is generally a deductible business expense regardless.
Step 1: Restate every offer as total dollars repaid
The cleanest common denominator is the total amount of cash that leaves your business over the life of the financing. For an installment loan, that is the monthly payment times the number of payments. The cost of borrowing is that total minus the cash you actually received.
Take a $50,000 term loan at a 13% interest rate over 36 months. The payment works out to $1,684.70 a month. Over 36 payments you repay $60,649, so the cost of the loan is about $10,649. That single dollar figure - $10,649 to borrow $50,000 for three years - is what you will compare against every other offer.
Step 2: Convert a factor rate into a real APR
A factor rate is a flat multiplier, not an interest rate, and that is exactly why it is easy to underestimate. With a factor rate, you multiply the amount advanced by the factor to get the total you must repay. The fee does not shrink as you pay down the balance the way interest does, so the same factor produces a much higher APR when the money is repaid quickly.
Here is the cost of a $50,000 advance at common factor rates:
| Factor rate | Total repaid | Fee (cost) |
|---|---|---|
| 1.25 | $62,500 | $12,500 |
| 1.35 | $67,500 | $17,500 |
| 1.40 | $70,000 | $20,000 |
| 1.49 | $74,500 | $24,500 |
The flat fee tells you nothing about the rate until you account for how fast you repay it. Because a cash advance is collected daily or weekly, you give the money back quickly, which pushes the true APR sky-high. Converting a $50,000 advance at a 1.40 factor (a $20,000 fee) into an APR:
| Repayment term | Total repaid | Approx. APR |
|---|---|---|
| ~6 months | $70,000 | about 142% |
| ~9 months | $70,000 | about 95% |
| ~12 months | $70,000 | about 71% |
Same fee, wildly different APR, purely because of speed. A quick way to sanity-check a factor rate is to estimate the APR with this rule of thumb: APR is roughly the factor's fee divided by the cash received, then annualized for the average time you hold the money. For a precise figure you solve for the rate that makes the repayment stream equal the cash advanced, which is what the table above does.
Step 3: Fold in origination, packaging, and guarantee fees
The quoted interest rate is not the whole price, because business loans carry separate fees - origination, packaging, and on SBA loans a guarantee fee - that are often deducted from the proceeds. When fees come out of your disbursement, you receive less cash but still make payments based on the full loan amount, which raises the true APR above the note rate.
Take a $100,000 term loan at an 11% note rate over 5 years. The payment is $2,174.24 regardless of fees, but the cash you net changes the effective cost:
| Fees deducted up front | Cash you actually receive | True APR |
|---|---|---|
| None | $100,000 | 11.00% |
| 2.5% packaging ($2,500) | $97,500 | about 12.11% |
| 3.5% origination + packaging ($3,500) | $96,500 | about 12.56% |
An offer advertised at 11% can really cost over 12.5% once fees are netted out. Always ask whether fees are deducted from proceeds or added to the balance, and recompute the APR against the cash you will actually hold. The same $100,000 loan repays $130,455 over five years - about $30,455 in interest - before any fees, which is the total-dollar figure to carry into your comparison.
Step 4: Line the offers up side by side
Once every offer is expressed as total dollars repaid and an APR, the right choice usually becomes obvious. Here are three ways to raise $50,000, each normalized to the same two numbers (assuming a 1.40 factor advance repaid in about 9 months):
| Offer type | How it is quoted | Total repaid on $50,000 | Cost | Approx. APR |
|---|---|---|---|---|
| Term loan, 36 mo | 13% interest rate | $60,649 | $10,649 | ~13% |
| Term loan, 36 mo, with 3% fee | 13% + $1,500 fee | $60,649 on $48,500 net | $12,149 | ~14.5% |
| Merchant cash advance | 1.40 factor rate | $70,000 | $20,000 | ~95% |
The factor-rate advance is the most expensive by a wide margin even though "1.40" sounds smaller than "13%." That is the entire point of converting everything first. Run each installment offer through the business loan calculator and a generic loan calculator to confirm the payment and total, and use the balloon loan calculator if an offer has a large lump-sum payment at the end that the headline rate hides.
Step 5: Judge the offer against the return, not just the rate
An expensive offer can still make sense, and a cheap one can still be a mistake - it depends on what the money earns. The test is whether the financed activity returns more than the loan costs. A 95% APR advance that lets you buy inventory you flip at a 200% markup within weeks can pencil out; the same advance to cover slow overhead will bury you. Pressure-test the decision two ways:
- Return on the borrowed dollars. Estimate the profit the loan generates and compare it to the cost using the ROI calculator. If the return does not clear the APR, the offer fails regardless of how it is quoted.
- Sales needed to cover the payment. Confirm the extra revenue required to service the debt is realistic with a break-even calculator.
For neutral background on how APR captures the true cost of credit, the CFPB explanation of interest rate vs APR is a useful reference.
The bottom line
Never compare a business loan offer in the units the lender chose. Convert each one to total dollars repaid and an estimated APR, net out every origination, packaging, and guarantee fee against the cash you actually receive, and translate any factor rate into an annual rate using the repayment speed. Then pick the lowest true cost that the financed activity can comfortably out-earn. Start with the business loan calculator to get the dollar figure behind any rate you are quoted.
Try it yourself
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Open the Business Loan Calculator →Frequently asked questions
- How do I convert a factor rate to an APR?
- Convert a factor rate to an APR by first finding the fee, which is the advance times the factor minus the advance, then annualizing that fee over how fast you repay. A $50,000 advance at a 1.40 factor has a $20,000 fee; repaid in about 9 months it works out to roughly a 95% APR, but repaid in about 6 months the same fee is closer to 142% APR. The faster you repay a flat fee, the higher the APR.
- What is the difference between a factor rate and an interest rate?
- A factor rate is a flat multiplier applied once to the full advance, while an interest rate accrues on the declining balance over time. With a 1.40 factor on $50,000 you always repay $70,000 no matter how fast you pay, so paying early does not save you money. With an interest rate, paying down the balance reduces future interest. That is why factor-rate financing is usually far more expensive than it looks.
- Why does my business loan cost more than the quoted interest rate?
- Your loan costs more than the quoted rate because origination, packaging, and guarantee fees are often deducted from the proceeds, so you receive less cash but still pay on the full amount. A $100,000 loan at an 11% note rate with a $3,500 fee disburses only $96,500, pushing the true APR to about 12.56%. Always recompute the APR against the cash you actually receive, not the face amount.
- How do I compare a term loan to a merchant cash advance?
- Compare them by converting both to total dollars repaid and an APR. A $50,000 term loan at 13% over 36 months repays about $60,649, a roughly $10,649 cost. A $50,000 merchant cash advance at a 1.40 factor repaid in about 9 months repays $70,000, a $20,000 cost at roughly 95% APR. Expressed the same way, the term loan is far cheaper despite the advance's smaller-sounding number.
- What is the true cost of a $50,000 business loan?
- For a $50,000 term loan at a 13% interest rate over 36 months, the payment is about $1,684.70 and you repay roughly $60,649, making the cost of borrowing about $10,649. Adding a 3% origination fee deducted up front raises the effective cost to about $12,149 because you only net $48,500 in cash. Fees and term length change the true cost as much as the headline rate does.
- Is business loan interest tax deductible?
- Interest on a genuine business loan is generally a deductible business expense, unlike most personal loan interest. This is one reason business borrowing is judged on whether the financed activity out-earns the loan rather than on personal tax treatment. Deductibility depends on the proceeds being used for the business, so confirm the specifics with a tax professional for your situation.
- How do I know if a business loan is worth taking?
- A business loan is worth taking when the financed activity returns more than the loan costs. Estimate the profit the borrowed money will generate and compare it to the loan's APR using an ROI calculator; if the return does not clear the APR, the offer fails no matter how it is quoted. Then confirm with a break-even calculator that the extra sales needed to cover the payment are realistic.
- Why is APR a better comparison tool than the quoted rate or factor rate?
- APR is better because it folds the rate, the fees, and the repayment timing into one annualized number, letting you compare offers written in different units. A factor rate ignores repayment speed and a quoted interest rate ignores fees, so each can understate the real cost. Converting everything to APR and total dollars repaid is the only way to compare a term loan, a line of credit, and a cash advance fairly.
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