A lender comes back with an offer: £20,000 over two years at 9.9%. A second quotes 15.9% APR. A third doesn't quote a rate at all — it simply says you'll repay £23,000 in total. Most owners glance at those three and pick the 9.9%, because 9.9% is the smallest number on the page. On the figures below, it is also the most expensive money of the three.
Business borrowing is one of the few things you buy where the price is routinely quoted in incompatible units. Nobody is doing anything underhand; the units genuinely mean different things. But converting them all into one comparable number takes about ten minutes of arithmetic, and it is the highest-paid ten minutes in the whole process.
Three ways of quoting the same money
**APR** is the closest thing to a true price. It expresses the cost of credit — interest plus any compulsory fees — as an annual rate charged on the balance you still actually owe. Because you pay a term loan down month by month, that balance falls, and the APR reflects it.
**A flat rate** charges interest on the full original amount for the whole term, whether or not you have already repaid most of it. Borrow £20,000 at 9.9% flat over two years and you pay 9.9% of £20,000 twice over — £3,960 — even though your average outstanding balance across those two years is nearer £10,000. That is why a flat rate roughly doubles when you convert it to an APR-equivalent on a two-year term.
**A factor rate** is not an annual rate at all. It is a multiplier: £20,000 × 1.15 = £23,000 to repay. The number says nothing about time, which matters enormously, because the same 1.15 repaid over six months costs roughly twice as much per year as the same 1.15 repaid over twelve. Merchant cash advances and revenue-based finance are usually quoted this way, and what they really cost is worth reading before you sign one.
Putting real numbers on it
Take those three offers on £20,000. Every figure here is illustrative — the point is the method, not the rates you'll personally be offered.
**Offer A — 9.9% flat over 24 months.** Interest is £3,960, so the total repayable is £23,960 and the monthly payment is £998. Convert that repayment schedule into a true annual rate and you land just under 20% APR.
**Offer B — 15.9% APR over 24 months.** The monthly payment works out at about £968 and the total repayable at roughly £23,240.
**Offer C — factor rate of 1.15.** You repay £23,000, collected as a percentage of your card takings, and on a typical retail turnover it clears in about nine months. The cost of credit is £3,000, but you only had the use of the money for nine months and your average balance over that time was somewhere near £10,000 — around 3.3% a month, which annualises into the mid-40s.
Rank those by headline number and you get A, B, C. Rank them by cash actually handed over and you get C (£23,000), then B (£23,240), then A (£23,960). Rank them by the true price of the money and you get B at 15.9%, A at just under 20%, and C in the mid-40s. Three orderings, same three offers.
The lender quoting the friendliest-looking number is rarely the one charging the least. Ask all three for the total amount repayable and the ranking usually changes.
Who has to tell you the real rate — and who doesn't
If you're a sole trader, or a partnership of two or three partners, borrowing under £25,000, the agreement is regulated under the Consumer Credit Act even though the money is for the business — and the lender has to disclose an APR. Borrow more than £25,000 for business purposes, or borrow through a limited company, and the agreement falls outside that regime: nobody is obliged to quote you an APR at all.
That is precisely why flat rates and factor rates cluster at the larger and the incorporated end of the market. It isn't a scandal, it's the absence of a rule — and the gap it leaves is yours to fill with your own arithmetic.
The fees that never appear in the headline
An arrangement fee is the common one, and it is often deducted from the advance rather than added to the balance. Borrow £20,000 with a 3% fee taken at source and £19,400 lands in your account while you repay on the full £20,000. Your real rate is higher than the one on the offer sheet, and the smaller and shorter the loan, the more that distortion bites.
Then check the early settlement position. On a regulated agreement you have a statutory right to settle early and receive a rebate of interest. On unregulated business lending, you get whatever the contract says — and on flat-rate deals that can mean paying a large slice of the remaining interest regardless. Ask for the settlement figure at month twelve before you sign, not after.
Last, the security. Most small-business lending above a modest size will want a personal guarantee, which moves the risk off the company's balance sheet and onto your house. That is a price too, even though it never appears as one.
Five questions to ask before you sign
One: what is the total amount repayable, in pounds? Two: what will actually land in the account after fees are deducted? Three: what is the settlement figure if I clear it at month twelve? Four: is a personal guarantee required, and from whom? Five: what happens on a single missed payment — a charge, a default, a demand for the full balance?
Ask for the answers by email rather than on the phone. A lender that won't put the total repayable in writing has told you something useful about the deal.
The decision rule
Two tests, and both have to pass. First, can the monthly payment survive your worst month rather than your average one — because the direct debit doesn't care that February was quiet. Second, does the thing you're borrowing for produce more than the total cost of credit over the same period? If you're borrowing £20,000 to make £2,800 of extra gross profit, the loan is deciding your year, not you.
A shorter term is nearly always cheaper in total and tighter on cash; a longer term is the reverse. Pick the shortest term whose payment you'd still be comfortable with in a bad quarter. And if the money is specifically for equipment, price asset finance against buying outright before defaulting to a term loan — it often prices better and it leaves your working capital where it belongs. Either way, look at what lenders see when they credit-check you before you apply anywhere, because the rate you're offered starts there.
Common questions
Is a flat rate ever cheaper than a loan quoted as an APR?
It can be, but you cannot tell from the rate itself — only from the total repayable. A flat rate charges interest on the original balance for the full term, so a 6% flat rate over two years works out at roughly 11 to 12% APR on an amortising schedule, and a 9.9% flat rate lands just under 20%. The rough conversion for a two-year loan is to double the flat rate; for a one-year loan the multiple is closer to 1.8. Do that conversion first, then compare. If two offers produce the same total repayable over the same term, the labels genuinely don't matter.
Do business lenders have to show an APR?
Not always. Lending to a sole trader or a partnership of two or three partners under £25,000 is regulated under the Consumer Credit Act, so an APR must be disclosed even though the borrowing is for business purposes. Above £25,000 for business purposes, or any borrowing by a limited company, the agreement is unregulated and there is no obligation to quote an APR, a total charge for credit, or to offer statutory early-settlement rebates. That is why larger business offers so often arrive as flat rates or factor rates. You can still ask for the total repayable and the settlement figures, and a straight lender will give you both.
Should I take a longer term to protect my cash flow?
Sometimes, but understand what you're buying. A longer term lowers the monthly payment and raises the total cost, because you're renting the money for longer. The sensible approach is to match the term to the life of whatever you're funding: a three-year term on equipment that lasts eight years is reasonable, while a five-year term on a marketing push that pays back in six months is not. Then stress-test the payment against your worst trading month rather than an average one. If it only works in a good month, take a smaller amount rather than a longer term.
Can I settle a business loan early and save the interest?
It depends entirely on whether the agreement is regulated. On a regulated agreement you have a statutory right to settle early and receive a rebate of the interest you haven't yet used. On unregulated business lending the contract decides, and flat-rate agreements frequently require most or all of the remaining interest anyway, which removes the benefit of paying off early. Ask for an illustrative settlement figure at month twelve before you sign, and get it in writing. It costs nothing to ask, and the answer tells you a great deal about how the lender makes its money.
