The amortization formula every business loan uses: M = P[r(1+r)^n] / [(1+r)^n - 1] where M = monthly P&I, P = principal, r = monthly rate (annual/12), n = total monthly payments. For factor-rate products (MCA, RBF), convert to APR: (factor - 1) / years × 1.8. A 1.30 factor over 6 months ≈ 108% APR. Always include origination, points, and fees in comparisons — a 9% rate with 5% origination has a higher effective APR than 10% with 1%. This page walks the math by product type with worked examples so you can verify any quote without a spreadsheet.
Online calculators are fine for the basic amortization math but they hide assumptions and rarely handle origination, points, balloon payments, or factor-rate conversions. Knowing the formulas yourself lets you verify any quote, compare offers across different structures, and catch the small fees that turn a competitive headline rate into a worse total cost. For broader context see business loan rates 2026 and business financing glossary.
The Amortization Formula
Almost every U.S. business loan amortizes — SBA, conventional, equipment, term loan, CRE, even most working capital loans. The formula:
M = P[r(1+r)^n] / [(1+r)^n - 1]
- M = monthly principal & interest payment
- P = principal (loan amount)
- r = monthly interest rate (annual rate / 12)
- n = total number of monthly payments (years × 12)
Worked example: $250K SBA 7(a), 10 years, 10.25% APR
- P = $250,000
- r = 0.1025 / 12 = 0.008542
- n = 10 × 12 = 120
- (1+r)^n = (1.008542)^120 ≈ 2.769
- M = 250,000 × (0.008542 × 2.769) / (2.769 - 1) = 250,000 × 0.013372 = ~$3,343/mo
- Total payback: 3,343 × 120 = $401,160 → ~$151K interest
The standard PMT() function in Excel/Google Sheets does this same calculation: =PMT(0.1025/12, 120, -250000) returns 3,341. Same answer, less arithmetic.
Factor Rate to APR Conversion
MCAs and revenue-based financing price as factor rates (1.20-1.50 typical), not APRs. To compare to amortizing loans, convert. Quick approximation:
Effective APR ≈ ((factor - 1) / term in years) × 1.8
The 1.8 multiplier adjusts for the declining-balance interest assumed by APR vs the flat factor rate (which charges the full amount regardless of paydown).
Worked example: $50K MCA, 1.30 factor, 6-month term
- Factor: 1.30 → total payback = $50,000 × 1.30 = $65,000 (interest cost: $15,000)
- Term in years: 0.5
- Effective APR ≈ ((1.30 - 1) / 0.5) × 1.8 = 0.6 × 1.8 = ~108% APR
The same factor rate over 12 months: 0.30/1 × 1.8 = 54% APR. Same dollar cost, half the term, double the effective APR. Always include term in the comparison.
Total Cost of Capital (Including Fees)
Headline rates don't include fees. Always compute total cost:
Total Cost = (Monthly P&I × N) + Origination + Points + Other Fees - Rebates
Worked example: comparing two equipment loans
Same $100K equipment, two offers:
- Lender A: 9% APR, 5% origination, 5-year term. M = $2,076. Total payback: $124,560 + $5,000 origination = $129,560.
- Lender B: 10% APR, 1% origination, 5-year term. M = $2,125. Total payback: $127,500 + $1,000 origination = $128,500.
Lender B's higher rate beats Lender A's lower rate after fees. The headline rate alone misled.
Balloon Payments
Common in CRE and SBA real-estate-secured loans: amortize over 25 years but balloon at year 5, 7, or 10. To compute:
- Calculate the monthly payment as if fully amortizing (e.g., 25 years)
- Identify the remaining balance at the balloon date
- The remaining balance is the balloon owed at maturity
The fastest way: use the =CUMPRINC() function in Excel or any standard amortization calculator. Note: the borrower owes the balloon either by refinancing to a new loan, selling the property, or paying off from operations.
Line of Credit Math
Lines of credit don't amortize fixed payments — you pay interest on the drawn balance plus minimum principal. Cost depends on average utilization:
Year 1 cost ≈ (Average Drawn Balance × APR) + Annual Fee + Origination
Example: $100K line, 14% APR, $1,500 annual fee, $1,000 origination
- Full draw all year: $100K × 14% + $1,500 + $1,000 = $16,500 year-1 cost
- 50% average utilization: $50K × 14% + $1,500 + $1,000 = $9,500 year-1 cost
- 20% average utilization: $20K × 14% + $1,500 + $1,000 = $5,300 year-1 cost
The fixed annual fee makes lines expensive at low utilization. Compare against an equivalent term loan to see which structure fits the actual draw pattern.
How to Verify Any Quote
- Confirm the structure — amortizing, factor rate, revolving, balloon
- Recompute the monthly payment using PMT() or the formula above
- Add all fees — origination, points, SBA fees, packaging, advisory
- Convert factor rates to APR if comparing to amortizing offers
- Compute total cost over the same hold period for all offers
- Pick on total cost, not headline rate
Next Step
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