Business · Worked example
A lower business-loan rate can hide a larger borrowing cost
In this five-year example, the offer with a 10% note rate has $1,000 deducted at funding. It delivers only $9,000 of usable cash and costs $3,748.23 in interest plus fees. The 12% no-fee offer delivers $10,000 and costs $3,346.67. The first offer has a lower monthly payment, but neither its usable proceeds nor its estimated borrowing cost is better in this particular scenario.
Start with the cash that reaches the business
Both contracts have a $10,000 face amount and 60 equal monthly payments. Offer A subtracts $1,000 of fees from disbursement, while Offer B deducts nothing. Repayments on both are based on the full $10,000, not the smaller amount Offer A delivers.
Offer A's monthly payment is $212.47, compared with $222.44 for Offer B. Comparing those payments alone misses the $1,000 funding gap. If the business needs $10,000 in usable cash, Offer A as entered does not meet that need.
Count a fee once, but in the right place
For Offer A, lifetime interest is $2,748.23. Add the $1,000 deducted fee to obtain $3,748.23 of total borrowing cost. Equivalently, subtract $9,000 received from $12,748.23 repaid. Do not subtract the fee from proceeds and then add it to repayments as well; that would count it twice.
Offer B's lifetime interest and total borrowing cost are both $3,346.67 because it has no entered fees. Total repayment is higher than Offer A's, but so is the cash received. Cost, payment size and funding delivered answer different questions.
Read the fee-adjusted rate with its definition
The calculator solves the monthly rate that discounts all repayments to the cash received, then multiplies by 12. That annualized monthly internal rate of return is approximately 14.65% for Offer A and 12.00% for Offer B. This is not the same as compounding a monthly rate into an effective annual yield.
This estimate is not a verified regulatory APR disclosure. Required charges and methods depend on the product and applicable rules. CFPB consumer-loan guidance is useful background on why rates and fees belong together, not proof of how a particular business lender must disclose them. Request the actual repayment schedule, fees and terms.
Same face amount and term, different usable proceeds
Hypothetical inputs: Face amount for each offer: 10000; Offer A note interest rate (%): 10; Offer A term (months): 60; Offer A fees deducted at funding: 1000; Offer B note interest rate (%): 12; Offer B term (months): 60; Offer B fees deducted at funding: 0.
- Offer A net cash received: $9,000.00
- Offer A interest plus fees: $3,748.23
- Offer A fee-adjusted annualized rate: 14.65%
- Offer B net cash received: $10,000.00
- Offer B interest plus fees: $3,346.67
- Offer B fee-adjusted annualized rate: 12.00%
Limitations and what to check
Fixed note rates, equal monthly payments and fees deducted at funding only. No prepayment, variable rate, balloon, daily payment, taxes or outside transaction costs. Different terms or funding needs can change the comparison. This is neither a lender quote nor financial or legal advice.
Sources
- CFPB: Get to know loan costs — Consumer-mortgage background explaining rate and fee tradeoffs. It does not establish a regulatory APR method for these hypothetical business loans.