To compare business finance offers, convert every offer to the same three numbers: the total amount you will repay, the monthly (or weekly) cash leaving the account, and what you stand to lose if things go wrong. The headline rate alone cannot give you any of them, because providers quote rates in different ways, charge different fees and collect repayments on different schedules. Once the three numbers are side by side, the non-financial terms, such as security, guarantees, covenants and flexibility, decide between offers that look similar.
APR, flat rate and factor rate are not the same thing
The first task is to work out what kind of rate you have been quoted. Three conventions are in common use and they are not interchangeable.
APR
The annual percentage rate expresses the cost of credit, including compulsory fees, as a yearly rate on the balance actually outstanding. Because it accounts for the balance falling as you repay, it is the most reliable basis for comparison. It is compulsory on regulated agreements only.
Flat rate
A flat rate charges interest on the original amount for the whole term, ignoring the fact that you repay some of it every month. A £20,000 loan at a 10 per cent flat rate over two years costs £4,000 in interest, or £1,000 a month in total. Because the average balance outstanding over the two years is only about £10,000, the equivalent APR is roughly 18 to 19 per cent. As a rule of thumb, a flat rate is close to half the equivalent APR.
Factor rate
Merchant cash advances and some short-term products quote a factor rate: a multiplier applied to the advance. Borrow £20,000 at a factor of 1.25 and you repay £25,000, a cost of £5,000. If that is collected over 12 months, the cost is 25 per cent of the advance, but because the balance reduces through the year the equivalent APR is well over 40 per cent. The factor rate also does not fall if you repay early, because the total is fixed on day one. Our page on merchant cash advance debt looks at the consequences.
All figures in this section are illustrative only. The point is that a "10 per cent" loan and a "1.25" advance are not comparable until both are converted to a total cost and, ideally, an APR.
Total cost of credit
The total cost of credit is everything you pay over the life of the facility beyond the amount borrowed: interest, arrangement fees, monitoring or service fees, exit fees and any compulsory insurance or valuation costs. Ask every provider for this single figure in writing. It cuts through differences in rate conventions and makes the first comparison simple: which offer costs less in pounds?
The cheapest total is not automatically the right choice: a longer term lowers the monthly payment but raises the total, and a business that needs breathing space may knowingly choose it.
Fees that change the picture
- Arrangement or facility fee: usually a percentage of the advance. Ask whether it is deducted up front, which reduces the cash you receive, or added to the loan, which means you pay interest on it.
- Exit or early settlement fee: some facilities charge a percentage of the balance, or a number of months' interest, if you repay early. This matters if you expect to refinance or sell the business.
- Monitoring, service or audit fees: common on invoice finance and asset-based facilities, charged monthly or annually regardless of use.
- Non-utilisation fees: charged on revolving facilities for the portion you do not draw.
- Valuation and legal fees: on secured facilities, often payable whether or not the loan completes.
- Default and late payment fees: rarely headlined, always in the agreement.
Term and repayment frequency
Term sets how long the debt runs and therefore how much interest accrues. Repayment frequency sets how the cost lands on the bank account. A monthly repayment leaves the account once; a weekly one leaves it four or five times a month; a daily one every working day. Some short-term lenders and most merchant cash advances collect daily or weekly.
Frequent collection is not necessarily more expensive, but it has a cash-flow effect that monthly repayment does not. A business whose customers pay at month end can find daily collections draining the account during the weeks when nothing is coming in. Before accepting a daily or weekly schedule, map it against the weeks when cash is thinnest. The guide to improving business cash flow explains how to build that forecast.
Security and personal guarantee terms
Two offers with identical cost are not identical if one is secured on the premises and the other is not. Check what security is required, whether a debenture over all the company's assets is included, and whether a personal guarantee is required from directors. If a guarantee is required, ask whether it is capped at a fixed amount, whether it covers only this facility, and how it is released. Our guides on secured versus unsecured finance and personal guarantees explain what to look for.
Covenants
A covenant is a promise in the agreement about how the business will behave, such as keeping profit above a stated multiple of interest, keeping borrowing below a stated multiple of earnings, or not taking other finance without consent. Breaching a covenant can allow the provider to demand repayment even if every payment has been made. Read them, check that the business comfortably meets them today, and ask what happens on a breach.
Flexibility
Can you overpay without penalty? Can you settle early, and on what terms? Can the facility be increased later without starting again? Can repayments be paused for a month if trading dips? These rights have real value, particularly for a business with strong months in which it could overpay.
Regulated or unregulated?
Lending of up to £25,000 to sole traders, partnerships of two or three people and unincorporated bodies is regulated under the Consumer Credit Act. The provider must be authorised by the Financial Conduct Authority, give prescribed information, assess affordability, treat customers in difficulty fairly, and offer access to the Financial Ombudsman Service. Lending to limited companies and LLPs generally falls outside that regime, so the agreement's own terms and the provider's own conduct standards are what you rely on. Knowing which category an offer falls into tells you how much protection sits behind it.
Broker and introducer commission
If an offer reaches you through a broker or introducer, ask whether they are paid by the provider, by you, or both, and how much. Commission can influence which products are presented and in what order. For regulated customers, disclosure is required; for limited companies, you may need to ask. Finance Business Debt sets out its own position on our regulatory information page.
A comparison checklist
- What kind of rate is quoted (APR, flat or factor), and what is the APR equivalent?
- What is the total cost of credit in pounds over the full term?
- What is every fee, and is the arrangement fee deducted or added?
- How long is the term, and how often are repayments collected?
- What security is taken, and is a personal guarantee required and capped?
- Are there covenants, and does the business meet them with room to spare?
- Can you overpay or settle early, and at what cost?
- Is the agreement regulated, and what complaints route applies?
- Who is paying the introducer, and how much?
- What happens if a payment is missed?
The debt comparison tool lets you enter two or more offers and see the total repayable and monthly cost side by side. It is an educational estimate rather than a quote, but it will show quickly whether a lower headline rate is actually cheaper. If you would like help interpreting an offer you have received, make an enquiry and we can explain what the terms mean.
Key takeaways
- Convert every offer to total cost, regular cash outgoing and what is at risk before comparing anything else.
- A flat rate is roughly half the equivalent APR; a factor rate can hide an APR well above 40 per cent.
- Fees, especially arrangement fees added to the loan and exit fees, can outweigh a difference in rate.
- Daily or weekly collection changes the cash-flow impact even when the total cost is the same.
- Security, guarantees, covenants, flexibility and regulatory status separate offers that look alike on price.