Borrowing money for your business: what it really costs
Business lending has a talent for hiding its price — factor rates that look like 8% but act like 30%, 'merchant cash advances' priced like emergencies. This lesson gives you the translation table: what APR actually measures, how amortization front-loads interest, and the four questions that expose any loan's real cost in five minutes.
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The translation table: what each number really means
| Term on the offer | What it sounds like | What it usually is |
|---|---|---|
| APR | The price | The honest one: total yearly cost of the money, fees included. Compare loans on this, always |
| 'Interest rate' alone | The price | APR minus fees — the truth is in the difference |
| Factor rate (1.2–1.5) | 20% on $100k? | A flat fee on the ORIGINAL amount, not a declining balance — 1.3 on a 6-month advance behaves like ~75% APR |
| 'Monthly payment' alone | Affordability | Affordability, yes — but a payment quote without term, total cost, and APR is a mood, not a number |
A 1.3 factor rate means you repay 130% of what you borrowed — computed on the full amount from day one, with no reduction as you pay down. Short term + flat fee = the most expensive money a small business can legally buy. Convert anything to APR before comparing it to anything.
Amortization: why early payments barely dent the balance
A standard loan charges interest on the remaining balance each month. Early in the loan, the balance is big, so most of your payment is interest; the principal barely moves. This is why a year into a 5-year loan, 'how much do I still owe?' hurts — and why extra principal payments are the cheapest flexibility you can buy.
- Ask for (or make) an amortization schedule: month-by-month split of interest vs. principal.
- Extra payments early in the term save the most interest — check for prepayment penalties first.
- Shorter term, same payment discipline: a 3-year loan costs dramatically less total interest than the same money at 5 years.
The four questions before any signature
- What is the APR — total cost, fees included, converted to a yearly number? (If they can't answer plainly, that IS the answer.)
- What exactly secures it? Personal guarantee, equipment, receivables — know what you lose in the failure case, not just the success case.
- Is the payment survivable in your WORST plausible month — the 13-week forecast's low point, not the average one?
- What does this money EARN? If the borrowed dollar doesn't return more than it costs (equipment that adds capacity, inventory that turns fast), the loan is just deficit spending with paperwork.
Good debt buys an income-producing asset. Bad debt buys a moment of relief — and charges you for the moment, then the relief, then the memory.
The JK23 Ledger Letter, issue 9
Frequently asked questions
Isn't some debt normal for a business?
Yes — working-capital lines for seasonal gaps and term loans for real equipment are standard tools. The distinction this lesson draws isn't debt vs. no debt; it's priced debt you understand vs. expensive money you grabbed in a panic.
What about 0% credit card offers?
Read the post-promo rate and the retroactive-interest clause. A 0% that becomes 27% retroactively if you're a day late on the fine print is a trap with a welcome mat. Same four questions apply.
My supplier offers net-60 instead of a discount — is that debt?
Effectively an interest-free loan, and often the best kind — until you pay late and the relationship reprices in ways no APR captures. Treat their terms like the asset they are.