APR explained: what it means on a business loan

APR stands for annual percentage rate, and the British Business Bank describes it as the rate of interest you agree to pay on money borrowed, and a useful way to compare how much interest you would pay on loans from different providers. Its glossary adds a simple rule: the higher the APR, the more you will pay.

In regulated lending, the idea is to express the total cost of borrowing as one yearly percentage, so that offers with different fees and charges can be put side by side. The rest of this guide covers where that works well, and where it does not apply to business borrowing.

The interest rate is the percentage charged on the money you borrow. The APR is meant to be wider: it rolls in certain fees and charges as well, so that two loans with the same interest rate but different fees can show different APRs.

The Financial Conduct Authority’s rules on regulated credit set out what counts. Its total charge for credit is the total cost of credit to the borrower. That includes any fee or charge payable to a credit broker, if the lender knows about it, the cost of maintaining an account used for payments and drawdowns, and the cost of any service you must take to get the credit, such as compulsory insurance.

That list is for regulated credit agreements. A business lender may treat costs differently, which is why you should always ask for the full list of charges.

Not always. Many business loans sit outside the rules that require an APR, so a business loan quote may use another measure, or none at all.

Under article 60C of the Regulated Activities Order, a credit agreement is an exempt agreement if the lender provides the borrower with credit exceeding £25,000 and the borrower enters into it wholly or predominantly for business purposes. Exempt agreements fall outside the regulated consumer credit regime, so you cannot assume a business quote will follow the consumer format.

Smaller facilities, and borrowing by some sole traders and partnerships, can be treated differently, and the rules turn on the details of each agreement. Ask the lender how its product is regulated and whether it will show you an APR.

Business lenders may quote the cost as an interest rate, a fixed fee, a total amount to repay or a share of your sales, depending on the product. These measures do not line up neatly with an APR, so compare them on the pounds you will pay back, not the headline percentage.

• Term loans: usually priced as an interest rate, plus any fees.
• Revenue finance and merchant cash advances: often priced as a fixed amount repaid from your takings. See our guide to merchant cash advance.
• Invoice finance: usually a service fee plus a charge for the money advanced. See invoice finance.

Our overview of business loan interest rates looks at how rates are set and what moves them.

Two loans with the same interest rate cost different amounts when their fees differ. The table is an illustration of the arithmetic only.

A headline interest rate would show both loans as equal. A full cost comparison shows that Loan B costs £1,500 more. Where an APR is shown, it is meant to capture exactly that gap.

Compare offers by the total amount you will repay, over what period and with what security, and then look at the rate. Ask each lender for the same set of figures so the comparison is fair.

• The total amount you will repay, including every fee
• The term and how often you repay
• Whether the rate is fixed or can change during the term
• What happens if you repay early
• What security is needed and whether a director must give a personal guarantee

Our step-by-step guide on how to compare business loan lenders goes through these questions, and personal guarantees explains one of the biggest risks to read before you sign.

There is no single good APR, because the figure depends on the lender, the product, the security and your circumstances. A lower APR on a like-for-like loan means a lower cost, but a lower number is not always the better deal.

Be wary of comparing an APR with a factor rate or fixed fee. They measure cost in different ways, so convert everything to the total you will repay and the time you will take to repay it.

It depends on whether the rate is fixed or variable. A fixed rate stays the same for the agreed term, while a variable rate can move, which changes what you pay. The agreement should say which applies, so read it before you sign.

If a rate can rise, ask what the worst case is and whether your repayments would still fit your cash flow. Our guide to the cash flow forecast shows how to test that.

Capzy is a credit broker, not a lender, and is paid by the lender. We introduce businesses to lenders and set out what comes back so you can compare offers on the total cost, whichever way each lender quotes it.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria. You can browse providers in our lender directory.