By the LoanFitPro Editorial Team · Updated June 2026 · Researched from authoritative sources. General information, not professional advice.
The price tag on a business loan is rarely the number the salesperson says first. A "10% rate" and a "1.3 factor" and a "$1,500 fee, no interest" can each be made to sound cheap, yet one of them might cost you four times as much as another. The only way to choose well is to translate every offer into the same unit — the true annualized cost — and then compare. This guide shows you how to do that arithmetic yourself.
The interest rate is the price of the borrowed money alone. The annual percentage rate (APR) folds the interest plus the financing fees into a single yearly percentage. Because two loans can carry the same interest rate but very different fees, APR is the comparison metric that actually protects you. A loan with a 9% interest rate and a fat origination fee can have a higher APR than a loan with an 11% rate and no fee.
The Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) have both pressed for clearer cost disclosure in small-business lending precisely because APR makes unequal offers comparable. When a lender will only quote a rate, a monthly cost, or a "cents on the dollar" figure but refuses to state an APR, treat that as a signal to compute it yourself.
Merchant cash advances (MCAs) and some short-term lenders price with a factor rate instead of an interest rate — a multiplier, typically 1.2 to 1.5, applied to the principal. The total you repay is simply principal × factor. It looks simple, and that simplicity is the trap: a factor rate is a flat fee that does not shrink as you pay down the balance, and over a short term it converts into an eye-watering APR.
Here is a $50,000 advance at a 1.3 factor, repaid over a 6-month term:
| Line item | Figure | How it's derived |
|---|---|---|
| Amount advanced (principal) | $50,000 | — |
| Factor rate | 1.30 | Quoted by lender |
| Total repayment | $65,000 | $50,000 × 1.30 |
| Cost of capital (fee) | $15,000 | $65,000 − $50,000 |
| Cost as % of principal | 30% | $15,000 ÷ $50,000 |
| Term | 6 months (0.5 yr) | Quoted by lender |
| Approximate APR | ~60%+ | 30% cost ÷ 0.5 yr (and higher once you account for paying it back as you go) |
Paying a 30% cost in only six months is roughly a 60% annualized rate at the most charitable reading — and the true APR is higher still, because with daily or weekly repayment you never have the full $50,000 for the whole six months. You are paying 30% on a balance that is shrinking the entire time. A flat 30% would be a fair annual rate only if you held the money for a full year; squeeze it into half a year and you have effectively doubled it.
A rough way to sanity-check any factor-rate offer: (factor − 1) ÷ term in years gives you a floor on the APR. For the example above, (1.30 − 1) ÷ 0.5 = 0.60, or 60% — and the real figure runs meaningfully above that floor.
Interest is only part of the cost. Watch for these, because each one raises APR:
A fee's sting depends on how long you hold the money. A $1,500 fee on a one-year loan is mild; the same $1,500 on a three-month loan is brutal, because you must annualize it. The shorter the term, the more a small-looking dollar fee balloons as a percentage. This is the single most common way borrowers underestimate cost.
Both offers below are for $40,000 at the same 12% nominal annual interest rate over a 1-year term. The only difference is the fee structure — and it changes the true cost materially.
| Offer A | Offer B | |
|---|---|---|
| Loan amount | $40,000 | $40,000 |
| Nominal interest rate | 12% | 12% |
| Term | 12 months | 12 months |
| Origination fee | 1% ($400) | 5% ($2,000) |
| Cash you actually receive | $39,600 | $38,000 |
| Approx. interest paid | ~$2,650 | ~$2,650 |
| Total cost (interest + fee) | ~$3,050 | ~$4,650 |
| Approximate APR | ~13.9% | ~17.7% |
Same advertised rate, yet Offer B costs about $1,600 more and carries an APR nearly four points higher — entirely because of the origination fee, which is also deducted from your funds so you net less while still repaying the full $40,000. APR is what exposes that gap; the headline rate hides it.
With amortizing interest (typical of term loans), each payment covers interest on the remaining balance plus some principal, so interest charged falls over time. Pay such a loan off early and you genuinely save the future interest. With simple flat or factor-based pricing, the total cost is fixed up front; paying early often saves you nothing because the fee was never tied to time. Always ask, in writing: "If I repay early, what do I save?"
MCAs and many short-term lenders pull repayment daily or weekly by automatic debit, often as a percentage of card sales or a fixed ACH. Two things follow. First, frequent repayment shortens the effective time you hold the money, which pushes the true APR higher than the simple math suggests. Second, the constant drain strains cash flow — a slow sales week still triggers the same debits, which is how businesses get pushed into stacking a second advance to cover the first. That spiral is the most dangerous part of these products.
For consumer credit, the federal Truth in Lending Act (TILA) and its Regulation Z require lenders to disclose APR in a standardized way. But TILA generally applies to credit extended for personal, family, or household purposes — it largely excludes business-purpose loans. That means a small-business borrower often has no federal right to a clean APR disclosure, which is exactly why factor-rate and fee-heavy offers can be quoted in confusing units.
Several states have moved to close this gap with commercial financing disclosure laws that require lenders to state APR (or a clear total cost) on small-business financing. California and New York were early movers, and other states have followed or proposed similar rules. The CFPB and FTC have likewise highlighted transparency in small-business lending. Still, coverage is uneven — so the burden of computing true cost frequently falls on you.
No. An interest rate is charged on the remaining balance over time and shrinks as you repay. A factor rate is a flat multiplier on the original principal, fixed up front. A 1.3 factor over a short term usually converts to a far higher APR than a 30% interest rate would imply.
Because federal law often doesn't require them to. The Truth in Lending Act mainly covers consumer credit and largely excludes business-purpose loans, so APR disclosure on small-business financing is not federally mandated — though some states, including California and New York, now require commercial financing disclosures.
It depends on the structure. On an amortizing term loan, early payoff saves future interest. On a factor-rate or flat-fee product, the total is usually fixed, so paying early may save little or nothing — and some loans add a prepayment penalty. Always confirm in writing.
There's no universal cutoff, but once true APR climbs into the high double digits — common with MCAs and very short-term advances — the financing can outpace the profit the funds generate. Compare against lower-cost options first, and be especially wary of daily-debit products that strain cash flow.
← Back to the LoanFitPro calculator · Explore alternative financing options →