How to calculate the true cost of business financing
Journey Capital TL;DR: Interest rates are only one part of the total cost of business financing. To make smart decisions, Canadian small business owners should factor in fees, repayment terms, and how the financing is structured. Use the annual percentage rate (APR) to compare options and understand your true cost before committing.to compare options and understand your true cost of business financing before committing.
Why understanding your total financing cost matters
When you are considering a business loan, it is essential to see the full picture. The interest rate alone does not tell the whole story. Fees, repayment terms, and loan structure all impact what you will pay over time. At Journey Capital, we believe in giving you clarity up front, so you can move forward with confidence.
What should the total cost of financing include?
Interest rates
This is the percentage you’re charged on the amount you borrow. It can be fixed or variable, and may be expressed as a simple rate, APR, or factor rate depending on the lender.
Fees
Common fees that can increase your total cost include:
- Origination or setup fees.
- Late payment penalties.
- Prepayment penalties.
- Administrative or servicing fees.
Repayment terms
Your repayment schedule also affects cost:
- Shorter terms mean higher regular payments but less total interest
- Longer terms mean lower regular payments but more interest over time
How to calculate the true cost of financing
Step 1: Know your loan amount and repayment term
Start with the basics: how much are you borrowing and for how long?
Step 2: Calculate interest
If you have a fixed rate:
Interest equals Principal multiplied by Interest Rate multiplied by Term (in years).
For variable rates, estimate based on current rates and expected changes.
Step 3: Add all fees
Include every applicable fee—origination, administration, servicing, and others.
Step 4: Find your total cost
Total cost equals Principal plus Interest plus Fees.
Step 5: Calculate APR
APR shows your annual cost of borrowing, including both interest and fees.
How to Calculate APR (Annual Percentage Rate):
APR = [(Interest + Fees) ÷ Principal] ÷ Number of years × 100
Step-by-step:
- Add together all interest paid and all fees paid over the life of the loan.
- Divide this sum by the original loan principal.
- Divide the result by the number of years in the loan term.
- Multiply by 100 to get the annual percentage rate.
Example:
If you borrow $50,000, pay $10,000 in interest and $500 in fees over 2 years:
- Multiply by 100: 0.105 × 100 = 10.5 percent APR
- Total interest plus fees: $10,000 + $500 = $10,500
- Divide by principal: $10,500 ÷ $50,000 = 0.21
- Divide by years: 0.21 ÷ 2 = 0.105
Tips to lower your financing costs
- Negotiate fees: Ask your lender to lower or waive fees.
- Choose a shorter term: If manageable, it reduces total interest.
- Improve your credit: Stronger credit can get you better rates.
Why choose Journey Capital?
At Journey Capital, transparency is at the heart of everything we do. Our solutions are designed to help Canadian small businesses grow, without surprises or hidden fees. You get the full story before you commit, so you can make the right decisions and move your business forward.
Frequently Asked Questions
The interest rate shows only the cost of borrowing. The APR includes interest and fees, giving you a more complete view of the loan’s total cost.
Not always. Some lenders charge origination or servicing fees. Others do not. Always ask for a full breakdown before accepting a loan offer.
Negotiate fees, improve your credit score, and choose shorter terms if your cash flow allows.
Not necessarily. A loan with a slightly higher rate but no fees or more flexibility could cost you less in the long run.
They are helpful for estimates, but they do not always include personalized rates or fees. Always confirm numbers directly with your lender.
APR (annual percentage rate) includes both interest and fees, giving you a true annual cost of borrowing. A factor rate is a multiplier used mostly for merchant cash advances and does not account for time or fees, so it can make the cost look lower than it really is. Always compare using APR for a true apples-to-apples view, but keep in mind that APR is only one way to compare financing options. You should also evaluate product benefits, such as variable repayment based on sales and speed of funding, which are characteristic of a merchant cash advance.
Ready to take control of your financing costs?
Apply for online funding and see what you’re pre-qualified for in just a few minutes.