How to Compare Business Loan Offers

The short answer

Compare business loan offers on the same basis: the same loan amount, the cash you actually receive, the total you will repay including fees, the monthly payment your cash flow must cover, and when the money arrives. The lowest interest rate is not always the cheapest offer, and the cheapest offer is not always the right one if it closes too late or comes with terms your business can't live with.

This guide is educational. Profit Theory, LLC is not a lender. Lenders set rates, fees and terms and decide approval, and every figure below is illustrative.

Step 1: Put every offer in writing

A verbal quote or a rate in an email is hard to compare. Ask each lender for a written term sheet, commitment letter or cost disclosure showing the amount, rate, fees and conditions. Some states require written cost disclosures for certain commercial financing; either way, a written offer is what you should compare.

Step 2: Compare total cost, not just rate

Rate drives the payment, but fees, points, guarantee fees and closing costs are paid too. Add them up in dollars and compare the total each offer costs over the term.

Step 3: Convert to an effective APR

An effective APR folds upfront fees into an annual rate based on the cash you actually receive. It lets you compare a low-rate, high-fee offer against a higher-rate, low-fee offer. Lenders may include different fees in their own APR figures, so calculate it yourself on the same assumptions for every offer.

Worked example (illustrative numbers only)

• Both offers: $250,000 over 10 years (n = 120), fees paid at closing
• Offer A: 9.50% rate, 2.00% origination ($5,000) + $2,500 closing = $7,500 fees; payment ≈ $3,235; total interest ≈ $138,200; all-in cost ≈ $145,700
• Offer B: 10.25% rate, no origination, $1,000 closing = $1,000 fees; payment ≈ $3,339; total interest ≈ $150,600; all-in cost ≈ $151,600
• Over the full 10 years, Offer A costs about $5,900 less despite higher fees
• If you expect to repay or refinance in 2 to 3 years, the $6,500 extra in upfront fees on Offer A weighs much more heavily, so rerun the comparison on your expected holding period
• Use the loan fees and points calculator with your own written offers; these figures are not quotes

Step 4: Compare timing

A loan that closes after your deadline can cost more than a higher rate. Ask each lender for its expected timeline in writing and what could slow it down.

• Time to a decision and to a written commitment
• Third-party items that add time: appraisals, environmental reports, business valuations, landlord or seller documents
• Conditions you must satisfy before closing, and when funds are actually available
• How long the offered rate and terms are held, and what happens if closing slips

Step 5: Compare terms that change risk

• Fixed or variable rate: what index a variable rate follows, how often it resets, and any floor or cap
• Prepayment penalties or fees for paying off early
• Collateral and personal guarantees required
• Covenants such as a minimum debt service coverage ratio, and what happens if you miss one
• Balloon payments or interest-only periods
• Required deposit accounts or other relationship conditions

Step 6: Check the payment against cash flow

Before accepting any offer, test whether the business can carry the payment with room to spare, including at a higher rate if the loan is variable.

Questions to ask every lender

• What is the rate, and is it fixed or variable? If variable, what is the index, margin, reset schedule, floor and cap?
• What are all the fees in dollars, and which are deducted from proceeds at closing?
• What APR do you quote, and which fees does it include?
• Is there a prepayment penalty, and how is it calculated?
• What collateral and personal guarantees are required?
• What covenants or reporting requirements apply?
• What is the expected time to commitment and to funding, and what conditions remain?
• How long is this offer valid?
• Is any part of the fee paid to a broker or referral source? (Profit Theory discloses how it is paid on its referral disclosure page.)

What this comparison can't tell you

A side-by-side comparison shows cost and terms. It doesn't tell you whether a loan is right for your situation, and it isn't individualized lending, legal or tax advice. Talk with your accountant or attorney about structure, taxes and guarantees.

Common questions

Sources

• SBA: Fund your business
• SBA: 7(a) loans — uses, maximum amount and eligibility
• CFPB: Difference between an interest rate and an APR