How it works
Monthly payment = loan × r ÷ (1 − (1 + r)−n), where r is the yearly rate ÷ 12 and n is the number of monthly payments.
Total interest = payment × n − loan. Coverage = monthly profit ÷ payment. Above 1.0, profit covers the payment; below it, the loan is paid from savings or new sales.
A worked example
A bakery borrows $50,000 for an oven and a remodel at 10.5% over 7 years. The payment is about $843 a month, 84 times, for about $20,815 of interest.
The bakery averages $1,500 a month of profit before the loan, so coverage is about 1.78: profit covers the payment with room to spare. At $800 a month of profit, it wouldn’t.
Common mistakes
- Comparing loans by the monthly payment alone. A longer term lowers the payment and raises the total cost.
- Forgetting fees. Upfront fees raise the true cost of the money, especially on short loans.
- Borrowing to cover losses without a plan to fix them. A loan buys time; it doesn't fix the problem that created the shortfall.
What this doesn’t tell you
Assumes a fixed rate and equal monthly payments with no prepayment. Variable-rate loans, interest-only periods, balloon payments, lines of credit and merchant cash advances work differently; ask the lender for the full payment schedule and the annual percentage rate.
Related calculators
Go deeper: 15 Numbers Every Small Business Owner Should Know, from The Groundwork Review.
Anticipated Questions
What's a good interest rate for a small business loan?
It changes with the market and your credit, collateral and time in business. Get quotes from more than one lender and compare the APR and total cost, not just the rate.
How does an SBA loan work?
The SBA guarantees part of a loan made by a bank or other lender, which can make it easier to qualify and get a longer term. You apply through a participating lender; the SBA website lists the programs and current rate caps.
Can I afford this loan?
Enter your monthly profit to see the coverage. Lenders set their own minimum coverage; ask yours what they require. Leave room for a slow month.
Should I pay a loan off early?
Check for a prepayment penalty first. If there isn't one and you have cash to spare after an emergency cushion, paying early cuts total interest.
Sources
Last reviewed October 19, 2026. How our calculators work. General information for planning, not legal, tax or financial advice. Found an error? Email info@groundworkbusinessadvisory.com.
