The most exploited gap in small business lending is the gap between how lenders quote rates and what borrowers actually understand. APR, factor rate, interest rate, fees, holdbacks, prepayment terms — they all mean different things, they're not directly comparable, and most lenders quote whichever number makes their offer look cheapest.
After helping thousands of business owners compare funding offers, I can tell you that the borrowers who get the best deals are the ones who learn to translate every offer into a single comparable number: total cost of capital. Here's how to do that.
The four ways lenders quote rates
1. Annual Percentage Rate (APR). The standardized way to express the cost of credit, including interest plus most fees, expressed as an annual percentage. According to the CFPB's APR explainer, APR includes both interest and most fees normalized to an annual rate. Required for consumer loans by federal law, but only voluntarily disclosed for many business loans. APR is the most useful number for comparing offers because it captures both interest AND fees, normalized to an annual rate.
2. Interest rate (without fees). The "headline" rate on a term loan or line of credit. It tells you what you're paying on the principal balance, but it doesn't include origination fees, application fees, or other charges. A 12% interest rate with 5% origination fees has a much higher APR than a flat 12%. For context on where benchmark business rates sit at any point in time, the Federal Reserve's H.15 selected interest rates release publishes the base rates that most commercial loan pricing is built on top of.
3. Factor rate. Used primarily for merchant cash advances and short-term financing. Expressed as a multiplier (e.g., 1.30) rather than a percentage. Your total repayment = advance amount × factor rate. A factor rate of 1.30 sounds like 30% but typically translates to 60-100% APR depending on repayment speed.
4. Monthly rate. Some short-term lenders quote "1% per month" or "2.5% per month." Multiply by 12 and you get the simple annual rate, but the actual APR is higher because of how short-term interest compounds and amortizes.
Why factor rates are the most deceptive
Factor rates exist because they let merchant cash advance funders avoid quoting an APR that would scare away borrowers. A factor rate of 1.30 sounds reasonable. The APR equivalent of 70% does not.
Here's the conversion. If you receive $50,000 with a 1.30 factor rate, you owe $65,000 total. The "interest" is $15,000 — 30% of the original advance. But the actual APR depends on how quickly you pay it back. The faster you pay (because business is good), the higher the APR. This is the opposite of how a normal loan works.
Quick conversion table for a 1.30 factor rate:
- Repaid in 12 months → ~55% APR
- Repaid in 9 months → ~70% APR
- Repaid in 6 months → ~95% APR
- Repaid in 4 months → ~140% APR
Always ask any factor-rate funder for the APR assuming the typical repayment speed. Reputable funders will give you a real number. Funders who refuse are showing you what kind of relationship you'd be entering.
The fees nobody talks about
Beyond the headline rate, business loans can include any of the following fees. None of them appear in the rate but all of them affect total cost:
Origination fee. A one-time fee at funding, typically 1-5% of the loan amount. On a $100K loan, a 3% origination fee is $3,000 deducted from your funding (you receive $97K but owe $100K).
Underwriting fee. A separate fee for the lender's underwriting work, typically $250-$1,500. Usually charged at funding.
Document fee / processing fee. A smaller miscellaneous fee, typically $100-$500.
Application fee. Charged before you even know if you're approved. This is a major red flag — reputable lenders don't charge upfront application fees.
Prepayment penalty. Some loans charge a penalty if you pay off early. This is typically expressed as a percentage of the remaining balance or a fixed dollar amount. SBA loans can have 5-3-1 prepayment penalties (5% in year 1, 3% in year 2, 1% in year 3).
Late payment fee. Charged if you miss a scheduled payment. Typically 5% of the missed payment or a flat $25-$50.
NSF / returned payment fee. Charged if your account doesn't have funds when the lender debits it. Typically $25-$50 per occurrence.
The total cost of capital framework
Forget all the rate vocabulary for a moment. The only number that matters when comparing offers is: how many dollars will I pay in fees, interest, and other charges over the life of this loan?
For a $50,000 loan:
- SBA 7(a): 9% APR over 5 years = ~$12,300 in interest. Plus 2% SBA guarantee fee = $1,000. Total cost: ~$13,300.
- Term loan: 18% APR over 3 years = ~$14,800 in interest. Plus 3% origination = $1,500. Total cost: ~$16,300.
- Line of credit: Drawn fully for 18 months at 18% APR = ~$8,100 in interest. (Lower because you can pay it down and reuse capacity.) Plus minimal fees.
- MCA: 1.30 factor rate, repaid over 7 months = $15,000 in fees. APR ~75%. Total cost: $15,000.
Notice the SBA loan is cheapest, but it takes 60-90 days to fund. The MCA costs only slightly more than a term loan in raw dollars, but it stretches over a much shorter time period — meaning you pay the money back fast and the cost-per-day is much higher. Speed has a price.
Five questions to ask any lender
Before signing any business loan or financing offer, get clear answers to these five questions in writing:
- What is the APR equivalent of this offer, including all fees?
- What is the total dollar amount I will pay back, assuming I pay on schedule?
- Are there any prepayment penalties? If so, how are they calculated?
- Are there any fees I haven't mentioned that will be charged at funding or during the loan term?
- What happens if I miss a payment, and what are the late fees?
A reputable lender will give you all five answers in writing without resistance. A lender who gets evasive is telling you something important about the relationship.
Why TurboFunding shows you the math
We work with a network of lenders, which means we're not committed to selling you any single product. Our job is to show you every offer you qualify for, translate them all into the same comparable framework, and help you choose the one that actually costs the least for your situation.
Apply in 5 minutes. We'll show you the real numbers — APR, total cost, all fees — before you sign anything.