Topic guide
Cost of Capital for Small Businesses: Rates, APR and Total Dollars
Short answer
The cost of capital is what you pay for money, expressed so offers can be compared. For debt, use the APR (which includes fees and timing) and the total dollars repaid. A quoted interest rate, factor rate, discount fee or lease rate on its own is not enough to compare offers.
Key points
- Interest rate: price per year on the balance. Factor rate: fixed price per deal. APR: yearly price including fees and timing.
- Fees taken out of the loan amount raise the APR because you receive less money.
- Lower APR doesn't always mean fewer dollars; shorter terms cost fewer dollars at a higher APR.
- Equity has a cost too: the share of future profits and control you give up.
Owners often compare financing offers on whatever number the provider puts first. That number is chosen by the provider, and it isn't always the one that matters.
Four ways the same money gets priced
| Quote | What it is | What it hides |
|---|---|---|
| Interest rate | Yearly price on the outstanding balance | Fees, and how often payments are taken |
| Factor rate | Fixed multiple you repay (1.25 = $1.25 per $1) | Time: the faster it's repaid, the higher the yearly cost |
| Discount or fee per period | Factoring and some short-term products | How many periods you'll actually pay for, plus other fees |
| Lease rate or money factor | Equipment leases | End-of-term payments, fees, ownership |
APR puts them on one scale: it's the yearly rate at which your payments are worth exactly the money you actually receive. That's why state laws in California and New York require APR on many business financing offers. Use our APR calculator to convert any of these.
Worked comparison
Two offers for roughly $50,000 (computed with the calculator):
- Offer A: $50,000 advance, factor 1.30, $1,000 fee from the funds, 126 daily payments. You receive $49,000 and repay $65,000. Estimated APR: about 118%. Cost: $16,000.
- Offer B: $50,000 term loan at 11.5% for 36 months, $1,500 fee. You receive $48,500 and repay about $59,360. APR: about 13.6%. Cost: about $10,860.
Offer B costs less per year and in total. But a short loan can cost fewer dollars than a long one even with a higher APR, so look at both numbers, and at the payment your cash flow can bear.
Fees that change the math
- Origination and underwriting fees (often deducted from the funds)
- Packaging, broker or "referral" fees
- Guaranty fees on SBA loans, which lenders may pass through
- Annual, unused-line and draw fees on lines of credit
- Prepayment penalties
- Late, NSF and ACH fees
Ask for a complete fee list in writing, and whether each fee is deducted from the funds, paid at closing or added to the balance.
Cost of other capital
- Trade credit is free if you pay within terms, but skipping an early-payment discount has a cost: passing up 2/10 net 30 is roughly 37% annualized.
- Owner's own cash isn't free; it could be earning something or cushioning the business.
- Equity has no payment, but investors take a share of future profits and some control. For a business that will grow in value, equity is usually the most expensive capital over time.
Habits that keep the cost down
- Borrow before you're desperate; urgency is the most expensive term in any deal.
- Get at least two offers and convert both to APR and total dollars.
- Match the term to the use, so you're not paying interest after the need is gone.
- Strengthen what lenders price on: cash flow, credit, collateral and time in business.
More levers in reducing the cost of capital.
Sources
- California DFPI: commercial financing disclosures (APR)
- SBA: Types of 7(a) loans (maximum interest rates)
- Federal Reserve Banks: 2026 Report on Employer Firms
Checked November 9, 2026. Program rules and scoring models change; the source is the authority.