How to compare total borrowing cost

The principle

Begin with the amount advanced, then subtract fees withheld to calculate net proceeds. List every required payment with its date, including principal, interest, administration charges, and any final balance. Add separate closing or broker costs. Keep conditional fees visible rather than silently assuming they will never apply.

Put it into practice

Compare offers that fund the same need over a relevant period. One offer may provide less cash after fees or require much faster repayment. A longer term can reduce the monthly payment while increasing total cost. Review both the overall cash outlay and the pressure on the operating forecast.

What people often miss

Do not compare a factor rate directly with an annual interest rate. For irregular payments or revenue-linked structures, annualized comparisons require explicit timing assumptions. Ask for a written payoff illustration at realistic dates, especially if refinancing or early repayment is possible. Total dollars, payment timing, and contractual flexibility each answer a different decision question.

Build the comparison from actual cash movements

Treat each offer as a timeline. Day one contains the advance, deductions, any old debt repaid directly and costs you must pay separately. Later dates contain required instalments and any final balance. Net new cash answers how much reaches the project; the full timeline answers what you must give back and when. Keep refinancing proceeds separate from money available for new spending.

BDC's loan-shopping guidance highlights flexibility and conditions alongside the interest rate. A low advertised rate cannot tell you the impact of a shorter repayment period, a required final payment or restrictions on early repayment. Keep a written assumptions column, especially for variable-rate loans, revolving facilities and payments linked to revenue.

Worked example: lower total dollars, higher monthly pressure

Fictional offers, in one currency, with fixed payments and no charges beyond those stated: Offer A advances $100,000, withholds a $3,000 fee and requires 12 end-of-month payments of $9,000. Offer B advances $97,000, withholds nothing and requires 18 end-of-month payments of $6,300. Each initially provides $97,000 of usable cash. Neither example is an available product or quoted market price.

A requires $108,000 of scheduled repayments, a difference of $11,000 above usable proceeds. B requires $113,400, a difference of $16,400. A has the lower dollar difference, but its monthly payment is $2,700 higher. That difference may matter during seasonal months. These dollar comparisons are not APR calculations and do not establish affordability. A borrower must model the dated payments against the business's own collections and obligations.

Ask for an exit illustration, not an assumption

If you expect to refinance or sell an asset, ask for a written payoff calculation at a realistic date. Include accrued interest, unpaid fees, minimum charges and any prepayment charge. Do not assume a fixed financing charge falls proportionally when the balance is repaid sooner. The SBA's lender questions specifically include prepayment penalties and circumstances in which full repayment may be demanded.

For a credit line, compare the same draw pattern over the same period. Record unused-line charges, draw fees, renewal charges and the maturity balance where applicable. A scenario assuming continuous maximum use answers a different question from a seasonal borrowing plan. For variable pricing, identify the reference rate and show the cash impact of a stated hypothetical change.

Your offer-comparison checklist

Use lender documents as the source of truth. A blank field means 'not yet confirmed', not zero.

• Confirm the exact cash received and any proceeds used to pay another obligation.
• List each payment date, amount and final balance; distinguish fixed amounts from estimates.
• Include separate broker, legal, appraisal, administration and closing costs when applicable.
• Request early-payoff and weaker-cash-flow scenarios without assuming the contract will change.
• Record collateral, guarantees, covenants and restrictions beside the price comparison.

Questions to ask about the disclosure

Ask: Is this number an annual rate, APR, factor or total dollar charge? What fees and timing assumptions are included? Are payments daily, weekly or monthly? Does early repayment reduce the cost? What becomes due at renewal or maturity? Which figure in the contract should I reconcile against this quote?

Disclosure rules depend on jurisdiction, provider and product. California has commercial-financing disclosure rules covering specified metrics and calculation assumptions; that does not establish the requirements for every U.S. state or for Canada. Use the disclosures applicable to your offer, and have unclear calculations explained before committing.

When refinancing, the bank deposit is only part of the picture

A fictional $50,000 advance withholds a $2,000 fee and uses $18,000 to repay old principal. The business receives $30,000 in cash. Assume the new agreement requires $62,500 in total repayments, with no other charges.

The business receives $48,000 of economic benefit: $30,000 of cash plus $18,000 of debt paid on its behalf. Repayments exceed that benefit by $14,500. Subtracting only the $30,000 deposit would produce $32,500 and incorrectly treat the retired $18,000 principal as an additional financing cost.

This simplified example assumes the old payoff contains principal only. If it includes unpaid interest, exit charges or unearned fixed fees, separate those amounts. Keep two views: cash available for the new project and the complete cost of replacing the old obligation. Neither dollar difference is an APR. New York’s disclosure framework distinguishes funds delivered directly from amounts paid on the recipient’s behalf; its specific legal requirements apply only to covered transactions.

Source: New York DFS: Commercial financing disclosures

Your next-step checklist

• Net usable proceeds
• Complete dated payment schedule
• Upfront, recurring, and exit charges
• Early-payoff and delayed-payment scenarios