You applied once, and now three term sheets are sitting in your inbox — one quotes an APR, one quotes a factor rate, and one quotes a "simple interest" rate with a weekly payment. They're deliberately hard to compare, and the offer that looks cheapest on paper is often the most expensive. This guide gives you a step-by-step framework to normalize any set of business loan offers into numbers you can actually stack side by side.
Why You Can't Compare the Quoted Rates
A term sheet from a bank might quote 11.5% APR. An online lender might quote a factor rate of 1.30. A third might quote "18% simple interest." These numbers are not in the same units, and comparing them directly is like comparing miles to kilometers.
- APR annualizes the cost of borrowing including most fees, assuming a declining balance. It's the most honest apples-to-apples metric.
- Factor rates (common in revenue-based financing and merchant cash advances) are a fixed multiplier on the advance. Borrow $100,000 at 1.30 and you owe $130,000 — period. Because that cost doesn't shrink as you pay down the balance, a 1.30 factor repaid over 12 months typically translates to an effective APR well above 50%, not 30%.
- Simple interest quotes often exclude origination fees and assume the full term, understating cost if fees are large or the term is short.
We break down the factor-rate math in detail in our factor rate vs. APR guide. For now, the fix is simple: convert everything to the same three metrics below.
The Three Numbers That Normalize Any Offer
1. Total payback
Add up every dollar you'll send the lender: principal, interest or fixed fee, origination fee, closing costs, wire fees, monthly maintenance or draw fees. Then subtract fees deducted from proceeds to see your net funded amount — the cash that actually hits your account.
Total cost of capital = total payback − net funded amount.
2. Effective APR
Take the total cost and annualize it against the money you actually had use of, over the actual repayment period. Short terms amplify this dramatically: a $10,000 fee on $100,000 is 10% if repaid over a year, but roughly 20% annualized if repaid over six months. If you don't want to do the math, ask each lender point-blank: "What is the APR equivalent of this offer, including all fees?" Under-regulation in commercial lending means they may not volunteer it — but a lender who refuses to answer is telling you something.
3. Payment-to-revenue ratio
Divide the total monthly payment obligation by your average monthly revenue. A $2,000 daily debit is roughly $42,000 per month — if you gross $120,000 monthly, that's a 35% payment-to-revenue ratio, which will strangle most businesses. As a rough guideline, many healthy businesses keep total debt payments under 10-15% of monthly revenue. Daily and weekly payments also interact badly with lumpy receivables; see how business loan payments work for the mechanics.
▦Estimate your term loans paymentsRun the numbers in the term loans estimator →▸A Worked Example: Three Offers on $100,000
Say you applied through a marketplace and received three offers for $100,000. Here's how they look before and after normalization (illustrative numbers):
| Offer A: Term Loan | Offer B: Revenue-Based Financing | Offer C: Line of Credit | |
|---|---|---|---|
| Quoted pricing | 14% APR | 1.30 factor rate | 16% APR on draws |
| Term | 36 months | ~12 months | 12-month revolving |
| Payment | ~$3,418/month | ~$515 daily (business days) | Interest-only on drawn balance |
| Origination fee | 3% ($3,000) | None quoted | 2% draw fee |
| Net funded | $97,000 | $100,000 | Up to $100,000 as needed |
| Total payback | ~$123,000 | $130,000 | Depends on usage |
| Total cost | ~$26,000 | $30,000 | ~$8,000-$18,000 typical usage |
| Effective APR (approx.) | ~16% with fees | 50%+ | ~18-20% with fees |
| Payment-to-revenue (on $120k/mo revenue) | ~3% | ~9% | Varies |
Notice what normalization reveals. Offer B's "30%" cost is really a 50%+ effective APR because it's repaid in a year with a fixed fee. Offer A's 14% becomes roughly 16% once the origination fee is baked in. And Offer C — a business line of credit — may be cheapest of all if you don't need the full $100,000 sitting idle, because you only pay for what you draw.
That doesn't automatically make A or C the winner. If your revenue is strong but your credit file is thin, Offer B may be the only one you actually qualify for at that amount — and if the capital funds inventory that returns 3x in 90 days, a higher cost of capital can still be a good trade. The point is to make the decision with real numbers, not marketing labels.
Fine-Print Red Flags to Catch Before You Sign
Prepayment terms. On amortizing term loans, paying early usually saves interest. On fixed-fee products, you often owe the full payback amount regardless — early payoff saves nothing unless the contract includes explicit prepayment discounts. Ask: "If I pay this off in half the time, what exactly do I owe?"
Confession of judgment. Now banned in many contexts but still appearing in some commercial agreements — it lets the lender obtain a judgment against you without a normal court process. Walk away or negotiate it out.
Blanket UCC-1 filings. A UCC lien on all business assets is standard for many lenders, but a blanket lien from a short-term lender can block you from getting equipment financing or a credit line later. Ask whether the lien is specific or blanket, and when it gets released.
Personal guarantee scope. Nearly all small-business financing requires a personal guarantee — that's normal. What's not normal is a guarantee that survives payoff, covers "future obligations," or includes a spouse who isn't an owner.
Default triggers and covenants. Some contracts define default broadly: a missed daily debit due to an NSF, taking on any additional financing (an anti-stacking clause), or even a decline in revenue. Know exactly what trips default and what happens next.
Fee stack beyond origination. Watch for underwriting fees, ACH fees, monthly "administration" fees, renewal fees, and early-termination fees on lines of credit. Individually small; collectively meaningful.
Seven Questions to Ask Every Lender
- What is the effective APR of this offer including all fees?
- What is my exact total payback in dollars, and my net funded amount after fees?
- If I prepay in full at the halfway point, what do I owe?
- Is the payment daily, weekly, or monthly — and is it a fixed debit or a percentage of revenue?
- Will you file a UCC-1? Specific or blanket? When is it released?
- What events constitute default, and are there covenants or anti-stacking clauses?
- Was this offer based on a soft pull, and when does it expire?
Write the answers down for each offer. A lender who answers clearly and in writing is usually a lender worth working with.
Use Competing Offers as Leverage
This is the part most borrowers skip: term sheets are negotiable, and nothing moves a lender like a real competing offer. If Offer A has the structure you want but Offer C has a lower rate, say so: "I have a comparable offer at a lower all-in cost. Can you match it or waive the origination fee?" Lenders routinely trim origination fees, shave rates, extend terms, or improve prepayment language to win a deal they've already underwritten.
This is exactly why applying through a marketplace beats applying to lenders one at a time. One application through EQ Funding reaches a network of lenders across the US and Canada who compete for your business — so you start the comparison process with genuine side-by-side offers instead of a single take-it-or-leave-it term sheet. EQ isn't a lender and doesn't approve or fund anything itself; the lenders do, and their competition is what puts you in the stronger negotiating seat. For more on how that dynamic works, see our marketplace vs. bank comparison.
The Bottom Line
Don't pick the offer with the smallest number on the front page. Normalize every term sheet to total payback, effective APR, and payment-to-revenue ratio; read the prepayment, lien, and default language; and make lenders compete on the final terms. An hour of side-by-side analysis routinely saves borrowers thousands of dollars — and, just as importantly, keeps you out of a payment structure your cash flow can't survive.