The principle
An interest rate describes the charge for borrowing principal under a specified calculation method. An annual percentage rate is an annualized cost measure that may include defined finance charges. What must be disclosed and which charges count can depend on the product and jurisdiction, so do not assume every commercial quote uses the same methodology.
Put it into practice
Ask the provider for the payment schedule, net advance, included fees, and calculation assumptions. A rate on a declining balance differs from a flat charge applied to the original amount throughout the term. The term length and payment frequency also affect how quickly the business returns principal.
What people often miss
A simple financing fee divided by the advance is not automatically an APR. Variable payments, early payoff, and withheld fees can complicate comparisons. Use consistent assumptions and keep the cash amounts alongside any percentage. Where a quote uses an unfamiliar label, request its definition in writing instead of translating it by guesswork.
Your next-step checklist
- Rate basis and calculation method
- Fees included in the stated percentage
- Actual net proceeds and payment dates
- Consistent annualization assumptions for comparison
Crack this combination.
Is a one-time fee divided by the advance automatically an APR?
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Sources & further reading
This file draws on the following references. Product availability and requirements must be confirmed with the provider.
FTC: small business financing issuesLevr: reviewing a debt term sheet