How this instrument works
A business term loan works exactly like a mortgage or an auto loan on the inside: a bank or online lender hands over a lump sum — for a delivery truck, a walk-in cooler, a leasehold buildout, or six months of payroll during a slow season — and the borrower repays it in equal monthly installments until the balance reaches zero on the last one. What differs is the decision on the other side of the desk. A homebuyer is financing a place to live; a business owner is financing a bet that the truck, the cooler, or the buildout earns back more than it costs, and the monthly payment computed here is the number an owner or a CFO weighs against expected revenue before signing anything.
The formula spreads principal and compounding interest evenly across every payment so the loan self-amortizes without a balloon at the end, and lenders lean on that fixed number directly: divide a business's annual net operating income by twelve times this monthly payment, plus any other debt service, to get the debt-service coverage ratio most banks and SBA lenders require to sit at 1.25 or higher before they approve anything. A thin coverage ratio is a far more common reason a viable business gets turned down than a weak credit score.
This sheet prices principal and interest on a fixed-rate, fully amortizing term loan only. It leaves out the SBA guarantee fee or a bank's origination points, charged once and capable of moving the loan's true annual cost without changing the payment shown here; it also has nothing to do with a merchant cash advance's factor rate, a flat multiplier like 1.3 applied once to the amount advanced rather than an interest rate compounded over time, or a variable-rate line of credit whose payment shifts every time the prime rate does.
- Enter the amount you need to borrow under Loan amount, $ — equipment cost, buildout budget, or working capital, before any fees the lender rolls in.
- Set the lender's quoted interest rate under Annual interest rate, % — the loan's stated rate, not a factor rate or an all-in APR that already bundles fees.
- Enter the repayment length in months under Loan term, months; many equipment loans cap this at the asset's expected useful life.
- Read Monthly payment, then re-run the term to see how a shorter loan raises the payment but lowers total interest paid over the life of the loan.
Worked example — $100,000 for equipment over five years
Borrow $100,000 (Loan amount, $) at an 8% annual rate (Annual interest rate, %) over 60 months (Loan term, months), five years — a common horizon for financing equipment expected to last that long. The monthly rate is r = 8 ÷ 1200 = 0.006667, and (1.006667)^60 works out to about 1.4898. Feeding those into the formula gives Monthly payment = $2,027.64, the exact figure this sheet returns for these inputs.
Across 60 payments that comes to about $121,658.37 handed to the lender, of which roughly $21,658.37 is interest on the original $100,000. Stretch the same loan to 120 months instead and the payment falls to about $1,213.28 — lighter on monthly cash flow, but total interest more than triples over the longer stretch, the exact trade a lender and a borrower weigh whenever a term gets pushed past what the financed asset will still be worth.
Questions
How is a business term loan different from a merchant cash advance?
A term loan like this one amortizes at a fixed interest rate over a set number of months, so Monthly payment stays constant and the balance reaches zero on schedule. A merchant cash advance instead sells future card sales at a factor rate — a flat multiplier like 1.3 applied once to the amount advanced — with repayment pulled as a share of daily sales, which usually works out to a far higher effective cost than the rate this formula prices.
What is debt-service coverage and why does my lender care?
Debt-service coverage ratio (DSCR) divides a business's annual net operating income by its annual debt payments, including twelve times whatever Monthly payment returns here. Banks and SBA lenders commonly require a DSCR of 1.25 or higher before approving a term loan, meaning the business needs to generate roughly 25% more cash than the loan actually costs — a cushion this payment figure feeds directly.
Does the rate I enter include the SBA guarantee fee or origination points?
No. Annual interest rate, % is the base interest rate only. SBA 7(a) loans add a one-time guarantee fee that can run from about 0.55% to 3.75% of the guaranteed portion depending on loan size, and many bank and online lenders charge origination points on top — both raise the loan's true annual cost without changing the fixed payment this sheet computes.
Should the loan term match how long the financed asset will last?
It is standard practice for equipment and vehicle financing: lenders usually cap the term at or below the asset's useful life, so the loan does not outlive what it paid for. A loan that funds working capital or payroll instead is not tied to a physical asset's lifespan, so lenders size that term around projected cash flow rather than depreciation.
Am I personally liable if the business can't make this payment?
Often, yes — most small-business term loans and SBA loans require a personal guarantee from any owner holding 20% or more of the company, meaning the lender can pursue personal assets if the business defaults. This sheet only prices the arithmetic of the payment itself; the guarantee, collateral, and covenants attached to a specific offer live in the loan agreement, not in this formula.
What happens to this payment if my loan has a variable rate instead of fixed?
This formula assumes one fixed rate for the full term, so Monthly payment stays constant across every installment. A variable-rate loan is usually quoted as a spread over a benchmark, commonly the prime rate, and the real payment recalculates whenever that benchmark moves — re-run this sheet with the current rate any time the benchmark changes to see the new fixed-rate equivalent.
References
- U.S. Small Business Administration — Loans overview
- Federal Reserve — Survey of Terms of Business Lending (E.2)
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.