A Must Read The Beginner's Guide to Small Business Loan Rates and Fees From Forbes

When shopping around for small business loans, most people ask themselves a few important questions. How much money can you get? What’s the interest rate? How long will you have to repay what you’ve borrowed?

But there’s another question that everyone should ask before accepting a final offer:

“What are all the rates and fees associated with this loan?”

A business loan might look like a great deal—until you factor in the fees, costs, and penalties you didn’t know to look out for. Here’s a breakdown of the 10 most important rates and fees when it comes to small business loans.

3 Types of Rates for Business Loans

1. Interest Rate

You probably have a pretty firm grasp on interest rates already:

An interest rate is what you pay on top of what you borrow from a lender (also called the principal). Lenders charge interest so they can make a profit off letting people borrow their money. And generally speaking, the “riskier” your lender believes you are, the higher your interest rate will be. 

You can calculate your interest rate in two ways: as simple interest or as compound interest.

Simple interest is a straightforward calculation that takes into account the amount you’re borrowing, the yearly interest rate, and the amount of time you’ll be paying the loan back. Here’s the formula:

Simple interest = Principal x Annual Interest Rate x Duration of Loan (Years)

Compound interest, on the other hand, is a bit more complicated—it compounds, or recalculates, your repayment based on monthly payments. When you repay a loan, you may wind up paying interest on interest in the end, and compound interest takes that into account.

Whichever formula you use to calculate your interest rate, the idea is the same. Your interest rate is the basic percentage of what you’ve borrowed that you’re paying back to the lender.
2. Annual Percentage Rate (APR)

Interest rate is the barebones cost of borrowing, but APR is the all-inclusive calculation.

APR, or annual percentage rate, combines your interest rate with all sorts of different fees and costs associated with your business loan, many of which we’re about to go over. They’re all rolled up into one number that indicates the total cost of your loan.

As of 1968, the Truth in Lending Act mandated that lenders release the APRs of their loans in addition to their interest rates, so that consumers and business owners like you could compare your options apples to apples. That’s the real power of APR—letting you understand, between two loans, which one will cost more in total.

While knowing a loan’s APR is incredibly helpful, you shouldn’t forget about its interest rate. APRs take interest rates into account, but it can still be useful to split a loan’s costs into recurring expenses and one-time upfront fees. Use both numbers to make an informed decision about your business financials.

3. Factor Rate

A factor rate is like an interest rate—but it’s usually used for cash advances and some short-term loans.

While an interest rate takes the form of a percentage, a factor rate (also called a buy rate) looks like a decimal instead. You might see factor rates of 1.2 or 1.4, for example. And factor rates seem easier to deal with: you simply multiply the loan amount by the factor rate to determine what you’re paying back.

If you’re borrowing $10,000 for a year at a factor rate of 1.35, for example, you just multiply through to see that you’ll repay a total of $13,500. While the interest cost is 35%, all of the interest is charged to the principal when the loan or advance is originated.

Factor rates tend to be attached to more expensive loans. While you’re repaying an additional $3,500 in the above example, the actual APR could be more like 63%.

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