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Two business loans can advertise very different numbers and still cost you the same, or advertise the same number and cost wildly different amounts. The reason is that lenders quote cost in several ways, and unless you know which is which, comparing them fairly is almost impossible. This guide breaks down APR, factor rates, flat rates and the total repayable, so you can read any offer and know what it truly costs.
In short. APR is the yearly cost of borrowing including fees, and the fairest way to compare loans of the same type. Flat rates and factor rates look smaller but describe cost differently and can hide a higher true cost. The one figure that never lies is the total amount repayable, so always find it before you sign.
APR, the annual percentage rate. The cost of the loan over a year as a percentage, including interest and most compulsory fees. Because it is standardised, it lets you compare two similar loans directly. A representative APR is the rate given to at least a bit more than half of accepted customers, so your own rate may differ.
Flat rate. Interest charged on the original amount borrowed for the whole term, ignoring the fact that you are paying the balance down. A flat rate always looks lower than the equivalent APR, sometimes close to double when converted, which is exactly why it is worth converting before you compare.
Factor rate. Common on merchant cash advances and some short term finance. Instead of a percentage the cost is a multiplier, such as 1.2. Borrow 10,000 pounds at a factor rate of 1.2 and you repay 12,000 pounds, whatever the term. Because it is not annualised, a factor rate can hide a very high effective cost if the money is repaid quickly.
The trap with both is that they ignore time. A flat rate charges interest on the full sum even as you repay it, so the real cost is higher than the headline suggests. A factor rate fixes the total cost regardless of how fast you repay, so clearing it early does not save you a penny, and the shorter the term the higher the true annual cost.
This is not to say these products are bad. They can be quick and useful for the right situation. But you cannot compare a factor rate against an APR at face value, because they measure different things. Convert everything to the total repayable and, where you can, an APR, before you judge.
The total amount repayable is the single most honest number in any loan offer. It is the sum of everything you will pay back: the amount borrowed, all interest, and every fee. Whatever pricing language a lender uses, the total repayable cuts through it, because it is simply the money leaving your account over the life of the loan.
Alongside it, check the fees that may not sit inside the headline rate.
✓ Arrangement or facility fees, sometimes a percentage of the loan.
✓ Early repayment charges, which can wipe out the benefit of clearing a loan sooner.
✓ Late payment and default fees.
✗ A low flat rate presented as if it were comparable to an APR.
✗ A factor rate quoted with no total repayable, which hides the true cost.
Say you borrow 20,000 pounds. Lender A offers a 6 percent flat rate over three years, which sounds cheap. Lender B offers a 10.5 percent APR. On the flat rate, 6 percent of 20,000 pounds is 1,200 pounds a year, so 3,600 pounds of interest across three years, a total repayable of 23,600 pounds. The 10.5 percent APR, because it is charged on the falling balance rather than the full sum, can produce a lower total repayable over the same term, even though its headline number looks larger. The only way to know which is cheaper is to convert both to the total repayable, which is why the smaller looking rate is not automatically the better deal.
Never compare a flat rate or a factor rate against an APR at face value. Convert every offer to the total amount repayable across the same term, add the fees, and compare those figures. The lowest headline rate is often not the lowest cost.
1. Get the total repayable for each. Ask every lender for the full amount you will repay, including all fees, over the same term.
2. Convert rates to the same basis. Where a flat or factor rate is quoted, ask for the representative APR or work out the total repayable so you are comparing like with like.
3. Check the fees separately. Arrangement fees and early repayment charges can change which deal is cheapest, so read them before deciding.
4. Match the term to the need. A longer term lowers the monthly payment but usually raises the total interest, so balance affordability against total cost.
No, it only looks cheaper. A flat rate charges interest on the full amount for the whole term, so the equivalent APR is usually much higher. Always convert before comparing.
A multiplier used mainly on merchant cash advances. Borrow 10,000 pounds at 1.2 and you repay 12,000 pounds. It is not annualised, so a short repayment period can mean a very high effective cost.
The rate given to at least a bit over half of accepted applicants. Your own rate depends on your circumstances and could be higher or lower.
Usually not. The total cost is fixed by the factor rate at the start, so early repayment rarely reduces it. Check the terms before assuming a saving.
The total amount repayable, including all fees, over the same term. It is the only figure that cannot be dressed up, whatever pricing language the lender uses.
This guide is general information, not financial or credit advice. Compare Commercial is not authorised or regulated by the FCA. We introduce UK limited companies to third-party finance providers.