Model business borrowing with fees, compensating balances and the true cost of capital.
A business loan's stated APR understates the actual burden when upfront guaranty fees, compensating balance requirements and annual service fees are included. The 'true cost of capital' here is the rate that would produce the same total monthly outlay if the business had received the full net usable proceeds — making different loan structures directly comparable.
Scheduled payment
Payment = Principal × monthly_rate / (1 − (1+r)^−n)
True cost of capital
Solve for rate where PMT(net proceeds, r, n) = monthly payment + monthly fees
Some bank lenders require you to keep a deposit (often 10–15% of the loan) at their institution as a condition of the loan. You're effectively borrowing $100,000 but only deploying $85,000, while paying interest on $100,000. This raises the effective cost of capital materially.
The SBA charges a guaranty fee on the government-guaranteed portion of a 7(a) loan. For loans over $150,000 with terms over 1 year, it's currently 2.5–3.5% of the guaranteed amount (typically 75–85% of the loan). It's usually financed into the loan, but that increases interest.
Use this calculator's 'true cost of capital' for both. SBA loans often have lower stated rates but carry guaranty fees; conventional loans may have higher rates but no guaranty fee. The true cost of capital after all fees is the correct comparison metric.