How business loan interest is calculated

The three ways interest gets quoted

Lenders describe the cost of a business loan in three main ways, and they are not interchangeable. A reducing-balance rate charges interest only on what you still owe, so the interest portion of each payment shrinks as the balance falls. A flat rate charges interest on the full original sum for the whole term, which sounds cheaper but usually is not. A factor rate is a multiplier — borrow £10,000 at a factor of 1.2 and you repay £12,000 — common on merchant cash advances.

Why a flat rate costs more than it looks

Because a flat rate keeps charging interest on the whole original balance even as you pay it down, the true cost is roughly double the flat number once expressed as an APR. A 6% flat rate over a year is closer to 11–12% APR. This is exactly why the FCA requires a representative APR on regulated consumer lending — though business lending to companies is exempt, so you should always ask a business lender to express the cost as an APR or total repayable before comparing.

A worked example

Take £20,000 over two years. On a reducing-balance basis at 10% you would pay around £2,150 in interest. On a 10% flat rate you would pay £4,000 — nearly double — because the 10% is applied to the full £20,000 in both years. The monthly payment looks similar, but the total repayable does not. Always compare on total repayable, not the headline rate.

Use the calculator

Enter your amount, rate and term below to see the monthly payment and total interest on a reducing-balance loan, then compare it against a quote you have been given.

Where this fits with Credicorp

Credicorp lends to your company, not to you personally, and takes no personal guarantee. See indicative terms on business loans, or apply online in minutes.

To compare the all-in cost of two offers side by side, use the true cost of borrowing calculator, and read APR vs factor rate before you sign anything.