In this blog we explain some of the fees which you may come across.
Interest Rate and APR
The Interest Rate is the % rate charged on the principal balance of a loan (or an advance).
The Annualised Percentage Rate (APR) is the interest rate expressed as an annual rate (not just for the term of your loan).
Service Fee / Discount Rate
A Service Fee / Discount Rate is a form of interest, however is expressed as a % of the invoice amount being financed. For example, a 3% Service Fee on a $1,000 invoice is $30.
Importantly the Discount Fee is not expressed over any particular term, so is not directly comparable to an interest rate. For example a Discount Fee of say 3% for an invoice which is due to be paid in 30 days represents an annualised interest rate of 36% (ie 3% for one month on a simple interest basis).
Factor Rate / Fee
A Factor Rate is a multiplier charged on an advance expressed as 1.2, 1.3 etc. For example, a $1,000 advance with a factor rate of 1.2 means you will need to repay $1,200. A factor rate does not take into account the term of the loan / advance.
Factor Rates are most commonly used in relation to unsecured business cash advances (such as Merchant Cash Advances).
Prepayment fee / penalty
A variable fee charged if an advance or facility is repaid before its due date. In effect, this fee compensates the finance provider for interest that would have been earned had the transaction run to its full term.
A (usually) flat fee charged for establishing facility documentation. This is usually explained as a recovery of legal and administration costs.
A (usually) flat fee charged to recover the finance provider’s costs of conducting a credit assessment such as obtaining external credit data.
Ad Hoc fees
A range of additional ad hoc fees may be charged on the basis that additional services are being provided, or costs incurred. Ad hoc fees vary widely between providers and may include audit fees, facility fees and so on.
As can be seen, finance providers may impose a wide variety of fees and charges in addition to the interest rate. In many instances these fees are confusing, and have questionable economic justification.
The bottom line is that these fees can add considerably to the overall finance cost. When assessing funding alternatives, make sure to take all fees into account in calculating the true cost of finance.
After assessing your alternatives, we strongly recommend selecting a provider that offers a simple, transparent solution that meets your needs at the lowest overall cost.