How Interest Rates Should Be Calculated: APR or MCA?

If you are a small business owner looking for financing – you have a few options to consider, and it is important to run the numbers on different interest rates before taking on any new debt financing.

If your business has great credit and doesn’t mind a lengthy application process – you’ll likely be best off with a commercial bank. The problem is, commercial banks have very tight requirements, making young businesses far less likely to get approved.

When considering an unsecured small business loan (term loan), or a merchant cash advance payment, you need to consider the APR (annual percentage rate), not just the interest rates. While many lenders can boast low stated interest rates, they often turn out to be much higher. This is a major problem, especially with lenders that use daily payment terms or merchant cash advance percentage of sales approaches.

Below, we will simulate three examples of a $50,000 loan, each with a stated 20% interest rate, to help clarify the three approaches:

Example 1

You get approved for $50,000 in Merchant Cash Advance financing, with a 1.2-factor rate. This means you will be required to pay back $60,000, which at first glance may look like a 20% interest rate. With a 20% daily credit sales retrieval rate and projected monthly cash flow of $35,000, your daily payments are 233 dollars. This means it will take you 258 days to pay off the loan, and your real APR is 53.25% – more than double the interest rate you thought you were getting!

Example 2

Business loans with daily payments can also be deceptive – if you take the same one year loan of $50,000 (with an associated $2000 origination fee), and your quoted interest rate is 20%, then you are making daily payments of $227 and your APR is 45.73%, far higher than you anticipated.

Example 3

Term Loans use an amortization schedule that bases interest payments on the remaining principal, so you end up paying less. A $50,000 dollar loan with a quoted 20% interest rate and $2000 origination fee ends up with an APR of 28.41% – much lower than the other options.

The bottom line

An important thing to note is that Lending Loop does not have any penalty for early payments – while other lenders you would still owe them the full interest amount. At Lending Loop, if you pay off your loan early, you only owe the amount of interest on the length of the loan. LendingLoop also encourages longer-term loans, so when you stretch the same term loan over a period of three years, the APR drops to 23%. Using APR is the only way to fairly compare stated interest rates from different financing options.

Use our Rate Comparison Loan Calculator to see how much you could save with a Lending Loop loan.