Business Loan APR: how to understand the cost of borrowing

Business Loan APR: how to understand the cost of borrowing


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If you’re looking for a small business loan and comparing options, it’s important to understand how interest and other charges will affect the overall amount you have to repay. Annual percentage rate (APR) is one of the key metrics that borrowers must evaluate because it reflects the total cost of credit and will vary according to individual circumstances. 

APR and interest rates are often assumed to be the same thing, but while they are similar, there are differences in the way they are calculated. When considering business loan costs, it’s important to understand the differences between the advertised interest rate and the APR, which will include additional fees. 

Choosing the best funding to support your business growth can feel daunting, with a wide range of financing options and conditions on offer. Let’s look at APR in more detail and how to get the best finance deals. 

What is APR for a business loan?

The annual percentage rate (APR) denotes the total cost of borrowing money. As the name implies, it’s calculated as an annual figure, which means the amount you would pay if you borrow the full loan amount and keep the funds for the entire year, then pay what you owe at the end of the year.

  • The APR is based on the interest rate and any additional fees related to the loan, such as origination costs, admin fees and settlement fees. 
  • While the interest rate only covers the interest charged on the principal amount, the APR provides a comprehensive view of the cost of borrowing over the term of a loan.

So, that’s the simple APR definition. In reality, the annual percentage rate won’t necessarily reflect the total cost of credit. 

How to understand APR

APR doesn’t include avoidable charges, like fees for late repayments or penalties for settling a loan early, and there is no guarantee that you’ll receive the advertised APR rate. This is because it is ’representative’, meaning at least 51% of customers will be offered a rate that’s the same as, or lower than, the representative APR. 

When you apply for a business loan, you’ll usually receive an individual APR based on the amount that you are borrowing, the loan term, your credit rating and other personal circumstances. The lender with the lowest advertised APR may not offer the best deal, as business loan costs vary, so you should always seek loan comparisons to determine the total cost of credit.

How is APR calculated?

APR is calculated by combining the interest and the loan fees. Then you divide it by the amount borrowed (the principal), followed by the number of days in the repayment term. Next, multiply by 365 and again by 100. 

Here is the APR formula:

Business loan APR calculation

For example, imagine you borrow £2,000 at a 5% interest rate over two years, with a closing administrative fee of £200. If you apply the interest rate, plus charges and loan term, using the APR formula, you’ll find that although the advertised interest rate is 5%, the true annual cost of the loan is 10%.

Business loan calculator

To find out what you might pay for a loan, try the iwoca business loan calculator. With iwoca, our flexible loan options can include different APRs depending on loan terms and individual business profiles. 

Find out how a small business loan can take your business further.


APR vs interest rate. What’s the difference?

When you apply for a loan, don’t forget the difference between the nominal interest rate (NIR) and the annual percentage rate (APR). 

  • NIR is what the lender charges you for the money you borrow, without including the other costs and fees that may apply when providing credit. It is a baseline cost that remains constant throughout the term, but, importantly, it doesn’t represent the total cost of borrowing. 
  • APR covers a range of variables. Apart from the NIR, borrowers must consider other fees associated with a loan, plus the impact of compounding. Origination fees, admin fees and early settlement/closing settlement fees will push up costs, and any payment defaults will also add to the overall figure.

How do lenders determine APR on a business loan?

Lenders will look at business background and trading history and performance, which will help to determine the credit-worthiness of a business and make a loan risk assessment, while the size of the loan is also one of the APR factors. 

The financial health of the business and the size of the loan will influence whether credit should be secured or unsecured. See ways to improve your business credit score. 

How to choose the right small business loan

There is more to consider than just the APR when choosing a small business loan, but it doesn’t have to be complicated. With iwoca, we make business loans simple

It’s important to remember that a loan may end up being much less expensive if you repay early. Using the following example, let’s see how the total cost of credit might compare with the APR for a typical iwoca customer:

  • The customer borrows £10,000 at an interest rate of 3.33% per month, corresponding to a 49% APR
  • Each month, the customer must pay at least the accrued interest and 1/12 of the total loan amount
  • Assuming they make only minimum repayments, they will clear the loan in 12 months at a total cost of £2,165 in interest or 21.65% of their original loan.
  • On the other hand, if they decide to repay early, it would reduce the cost. For example, if the full amount is repaid after one month, they will pay only £333 in interest or 3.33% of the original loan 
  • In both cases, the total cost of the loan is much lower than an APR of 49%.

What to consider alongside APR 

When evaluating loan options, APR is a key metric, but it’s not the only factor you should consider. Other factors will influence the total cost of lending and the overall utility of your loan, including:

Speed of funding

Fast approval times are essential if your business needs quick access to capital. Lenders like iwoca offer quick decision times, often within hours, which can be a significant advantage if you have a pressing need.

Likewise, once approved, how quickly can you access the funds? Immediate or same-day disbursement can be crucial for capitalising on time-sensitive opportunities or managing last-minute cash crunches.


Flexibility in loan terms and repayment options can provide significant benefits and reduce the cost of borrowing significantly:

  • Repayment Terms: Look for lenders that offer flexible repayment schedules that align with your cash flow. This can include options for early repayment without penalties, which can save you money on interest.
  • Loan Adjustments: Some lenders allow you to adjust your loan terms post-approval, such as extending the repayment period or increasing the loan amount.

iwoca’s short-term business loans can provide hassle-free funding at a cost-effective price. You can borrow £1000-£500,000 with flexible repayments, and repay earlier at no cost.

Words by
Sean Martin

Sean Martin is a writer and communications specialist working across financial, professional and technology services. He has been in the industry for more than 25 years and has worked with the likes of Barclays, Deutsche Bank and Lloyds.

Article published on
June 17, 2024
Last reviewed on:
July 17, 2024

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Business Loan APR: how to understand the cost of borrowing