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The interest rate on a business loan is the cost of borrowing the money itself, charged on your outstanding balance, while the APR (annual percentage rate) is an annualised figure that usually adds in compulsory costs such as an arrangement fee, giving you a fuller picture of the loan's true yearly cost. Your monthly repayment is worked out from the interest rate, not the APR, which is why the two numbers can look different even for the same loan. If you've seen both figures on a quote or a business loan calculator and weren't sure which one to trust, you're not alone, it's one of the most common points of confusion when comparing business finance. This guide explains what each figure means, how they're calculated, and how to read them properly so you can compare offers with confidence.
What is the difference between APR and interest rate on a business loan?
The interest rate is the percentage a lender charges on the balance you owe, and it's the figure your monthly repayment is actually calculated from. The APR takes that interest rate and layers on compulsory costs, most commonly the arrangement fee, then spreads the combined cost across the term of the loan to produce one annualised percentage.
Interest rate | APR | |
|---|---|---|
What it includes | Interest charged on the balance you owe | Interest plus compulsory fees, annualised across the loan term |
What your monthly repayment is based on | Yes, this is the figure used | No, APR is for comparison only |
Useful for | Understanding what you'll pay each month | Comparing the true cost of different loan offers |
Which number is usually higher | Lower, or equal if there are no fees | Higher once fees are added, or equal if there are none |
How is APR calculated on a business loan?
APR is worked out by taking the interest rate, adding in any compulsory fees, and spreading that combined cost evenly across the life of the loan to produce a single annual percentage. Here's a simple example to show how this plays out. For example, if you borrow £50,000 over 3 years at a 9% interest rate, with a 2% arrangement fee (£1,000) deducted from the amount you actually receive. Your monthly repayment, based on the 9% rate, comes to around £1,591. But because you only received £49,000 after the fee, while still repaying based on the full £50,000, the true annual cost works out closer to 10.9%, which is the APR. That gap tends to be wider on shorter loans, since a fixed fee makes up a bigger share of the total cost when it's spread over fewer years.
Flat rate, reducing balance rate, and factor rate explained
Lenders don't all price a loan the same way, which is another reason the numbers on a quote can look different from one lender to the next.
Rate type | How it works | Where you'll usually see it |
|---|---|---|
Reducing balance rate | Interest is charged only on what you still owe, so the interest cost falls as you repay | Most business term loans and bank lending |
Flat rate | Interest is charged on the original loan amount for the whole term, even as the balance falls | Some shorter term loans and asset finance products |
Factor rate | A fixed multiplier applied to the amount you borrow, for example 1.2, meaning you repay £1.20 for every £1 borrowed, regardless of how quickly you clear it | Merchant cash advances and some revenue based finance |
A flat rate produces a higher true cost than a reducing balance rate with the same headline percentage, because you keep paying interest on money you've already repaid. A factor rate doesn't convert directly into an APR either, since it isn't annualised, repaying a 1.2 factor rate advance in four months costs the same in cash terms as repaying it in eight, but the faster you clear it, the higher the effective annual cost works out to be.
What does representative APR mean?
A representative APR is the rate a lender expects at least 51% of successful applicants to receive. It's a useful starting point for comparing lenders, but it's not a guarantee of the rate you'll personally be offered. Your actual rate depends on your trading history, turnover, cash flow and credit profile, so you could end up above or below the representative figure once you apply.
What's the average business loan APR in the UK?
Business loan rates vary significantly depending on the lender and your business profile. Here's how this typically breaks down.
Business profile | Typical APR range | Where you'll usually find it |
|---|---|---|
Established businesses with strong accounts | From around 6.9% APR | High street banks and online lenders such as Funding Circle |
Growing SMEs with moderate trading history | Roughly 8% to 20% APR | Challenger banks and mainstream alternative lenders |
Newer businesses or higher risk lending | Upwards of 25% to 49%+ APR | Short term and specialist lenders |
Rates are illustrative and move with the market, so always check current terms directly with a lender. See our full business loan interest rates and fees comparison for a lender by lender breakdown, including arrangement fees.
How our business loan calculator shows you the full picture
Rather than giving you a single headline rate, our business loan calculator breaks a loan down into every figure you need to properly understand its cost. Enter your loan amount, term and interest rate, and you'll see:
This gives you a genuinely rounded view of a loan's cost in one place, rather than having to work each figure out yourself. As with any calculator, it's worth confirming any arrangement fee directly with a lender once you have a firm quote, so you can compare like for like across offers.
How to compare business loans
Once you know what each figure means, the hard part is applying that consistently across offers that rarely present their numbers the same way. One lender might lead with a low headline rate, another with a low monthly repayment, and a third with a factor rate that doesn't look like either. A few habits make a real difference to picking the most cost effective option rather than the best marketed one.
Doing this properly across several lenders individually takes time, and each application can leave a mark on your credit file. This is where comparing through a panel rather than lender by lender makes a practical difference. At Capitalise, one application is used to match your business against a panel of 130+ lenders, and a dedicated funding specialist talks you through how the rate, APR and fees on each offer actually compare, so you're weighing up real numbers rather than headline rates alone.
Compare your options and apply for business finance
Once you've used our business loan calculator to see your interest rate, APR, factor rate and total cost of borrowing, the next step is comparing that against what you could actually be offered. Apply through Capitalise and we'll match your business against our panel of 130+ lenders in one go, with a dedicated funding specialist on hand to compare rates, APR and fees across each offer and help you choose the option that genuinely costs the least.
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