However, while this is a good starting point, there are a lot more factors to consider when calculating the true cost of your business loan. At Moula, we recommend calculating the Annual Percentage Rate (APR) or using tools like our Business Loan Calculator to get a better idea of what your loan is going to cost. Our Customer Support Staff are also a great resource if you have any questions about rates, fees or any other comparisons.
To get a bit of perspective, at Moula, our rates start at 0.61% per fortnight on the outstanding amount (you can check out our business loan calculator to get a better idea on pricing). Like most lenders, our rates will vary depending on a number of factors relating to your business. This simple interest rate (typically reported as weekly, fortnightly or monthly) is the most commonly advertised comparison rate for business lenders.
Annual Percentage Rate (APR)
APR measures the cost of a loan over a one-year comparable term and is probably the best tool to use to get a thorough loan comparison. Let’s be clear, Annual Percentage Rate is not necessarily the same as Interest Rate. Interest Rate is a loose term that can be applied annually, monthly, weekly or even daily, and may or may not constitute the APR. If anything, Annualised Percentage Rate is a much more accurate and standardised representation of how much a business loan is going to cost per year.
Effective APR is an annualised rate that takes into account any loan fees, recurring charges and compounding interest. Essentially it calculates everything about the loan rather than just the nominal interest rate.
To break it down: if you borrow $10,000 to be repaid after a year at 10% interest, then the APR is 10% – you pay $11,000 after one year, simple right? But what if you borrow that $10,000 at 10% but to be repaid after 6 months? You still have to repay $11,000 but the APR is actually 20%. This is the same for 3 months (APR is 40%) and 1 month (APR is 120%).
In all of these scenarios, some lenders will still advertise a 10% “Interest Rate” – which is technically true – however, the APRs are very different, as is the actual cost of the business loan.
Amortisation also affects APR and needs to be factored into the calculations. For example: our $10,000 loan above, with principal and $1,000 interest paid at the end of one year has a 10% APR. However, if that $10,000 loan has monthly repayments then the Annual Percentage Rate is actually 20%, even though the “Interest Rate” may be 10% and the loan term is technically 12 months. This is because the borrower has only had the benefit of the loan for, on average, only half the year. The faster the loan is repaid, the higher the APR (if the total interest paid is fixed) – the same is true of fees baked into a loan.
What to Look For
Unfortunately, calculating APR is rarely that simple; you have to factor in establishment costs, recurring fees, early and late repayment fees etc. Add that to the fact that small business lenders don’t and aren’t required to advertise their APR, and you’ve got a very confusing loan interest calculation.
One of the biggest things to look out for is early repayment fees. Many lenders will advertise that they have no early repayment fees, but be skeptical! While they may not have any explicit early repayment fees, they may still require you to pay some or all of the outstanding interest on the loan. In these cases, it’s basically still an early repayment fee and your Annual Percentage Rate has just skyrocketed!
At the end of the day, the questions you need to ask yourself are:
- What is this loan costing me? (Any hidden fees or charges?)
- Are there any unclear terms? (Is the rate being marketed as APR or a percent of the notional?)
- Does funding at that cost make sense?
If you’re having trouble it could also be worth bringing in an accountant to have a look at the terms of the small business loan and compare them to your business’ financials. You can also give our helpful customer service team a call if you have any questions about rates, fees or just business loans in general!
Update: Easily compare APR of business loans with Smart Box
SMART Box™ is a one-page disclosure document shows the basic elements of the loan option being considered, including the Loan Amount, Disbursement Amount, Total Repayment Amount, the expected Loan Term, and Repayment Frequency. In addition, it shows six common loan pricing metrics: Total Cost of Credit, Average Monthly Payment, Total Interest Payment (TIP), Annual Percentage Rate (APR), Cents on the Dollar, and Factor Rate.
Moula, along with a handful of other online business lenders, introduced Smart Box in early 2019 as a simple way to compare online business loans. Learn more in What is SMART Box and How Does It Help Business Owners?
If you want to learn more about the interest of various business finance options, see What’s the Business Loan Interest Rate?