What is the difference between APR and flat rate on a business loan?

A flat rate applies the interest to the original loan amount for every period, regardless of how much has been repaid. APR (Annual Percentage Rate) reflects the true cost of borrowing, including how the balance reduces as you repay. A 6% flat rate is roughly equivalent to 11–12% APR — always compare loans on APR to get a like-for-like figure.

How much can a UK business borrow and what are typical rates?

Unsecured business loans in the UK typically range from £5,000 to £500,000, with rates from around 6% to 35% APR depending on business age, turnover, and creditworthiness. Secured loans (backed by property or assets) can reach £5 million+ at lower rates, often 4–12% APR.

Does early repayment affect the total cost of a business loan?

On amortising loans (APR-based), early repayment reduces total interest paid because interest accrues only on the outstanding balance. On flat-rate loans, some lenders apply an early repayment charge or use the Rule of 78 to front-load the interest, meaning you save less than you'd expect by paying early.

What is the Rule of 78 in business lending?

The Rule of 78 is a method some lenders use to calculate how much interest you've 'used' at any point in a loan term. It front-loads interest so that early repayment saves relatively little. It's more common in hire purchase and some unsecured lending. Always check if a lender uses this method before signing.

Can I include the arrangement fee in my repayment calculation?

Yes. If the arrangement fee is added to the loan (common for secured loans), include it in the principal (P) in your calculation. If it's paid upfront, it doesn't affect monthly payments but does increase your total cost of borrowing. Always calculate the total cost — arrangement fee + total interest — to compare deals properly.

How to Calculate Business Loan Repayments

The Two Ways Business Loan Interest Is Calculated

UK business lenders use one of two methods to calculate your repayments:

Amortising (APR-based) — interest is calculated on the outstanding balance each month. As you repay, the balance falls and so does the interest charge. Monthly payments stay the same, but the split between interest and capital shifts.
Flat rate — interest is calculated on the original loan amount for the entire term. Monthly payments are fixed and simple to calculate, but the effective APR is roughly double the quoted flat rate.

Understanding which method your lender uses is essential before you sign.

The Amortising Loan Formula

For an amortising loan, the monthly repayment (M) is:

M = P × [r(1+r)^n] / [(1+r)^n − 1]

Where:

P = principal (loan amount)
r = monthly interest rate (annual rate ÷ 12)
n = number of monthly payments

Worked Example — Unsecured Business Loan

Scenario: £75,000 unsecured loan, 12% APR, 36-month term

r = 12% ÷ 12 = 1% = 0.01
n = 36
M = 75,000 × [0.01 × (1.01)^36] / [(1.01)^36 − 1]
(1.01)^36 = 1.4308
M = 75,000 × [0.01 × 1.4308] / [1.4308 − 1]
M = 75,000 × 0.014308 / 0.4308
M = 75,000 × 0.033214
M = £2,491 per month
Total repaid: £2,491 × 36 = £89,676
Total interest: £14,676

The Flat Rate Formula

For a flat-rate loan:

Monthly payment = (P + (P × flat rate × years)) ÷ n

Worked Example — Flat Rate Loan

Scenario: £50,000 loan, 7% flat rate, 24-month term

Total interest = £50,000 × 7% × 2 = £7,000
Total repayable = £50,000 + £7,000 = £57,000
Monthly payment = £57,000 ÷ 24 = £2,375
Equivalent APR: approximately 13.5%

This is why flat rate quotes look attractive — always convert to APR before comparing.

Worked Example — Secured Business Loan

Scenario: £250,000 secured against a commercial property, 6.5% APR, 60-month term

r = 6.5% ÷ 12 = 0.5417% = 0.005417
n = 60
(1.005417)^60 = 1.3827
M = 250,000 × [0.005417 × 1.3827] / [1.3827 − 1]
M = 250,000 × 0.007490 / 0.3827
M = 250,000 × 0.019574
M = £4,894 per month
Total repaid: £293,640
Total interest: £43,640

Notice how the secured loan at 6.5% APR over 5 years costs less total interest than the unsecured loan at 12% APR over 3 years, even though the secured loan is for more than three times the amount.

APR vs Flat Rate — Side-by-Side Comparison

Loan	Amount	Quoted Rate	Monthly Payment	True APR	Total Interest
Unsecured A	£50,000	10% APR	£1,061	10%	£13,660
Unsecured B	£50,000	5.5% flat	£1,146	~10.8%	£27,500
Secured	£50,000	6.5% APR	£978	6.5%	£8,680

Always ask: “Is this rate APR or flat?” before accepting a headline figure.

Total Cost of Borrowing

Monthly repayments are only part of the picture. Add:

Arrangement/facility fee — typically 1–3% of the loan amount (£750–£7,500 on a £250,000 loan)
Early repayment charge — often 1–3 months’ interest
Annual review fee — some lenders charge £200–£500/year on revolving facilities

True total cost = total repayments + all fees

How to Get a Lower Monthly Payment

Extend the term — spreading £100,000 over 5 years instead of 3 cuts the monthly payment by roughly 30%, though total interest rises
Provide security — dropping from unsecured to a secured loan can halve the rate
Improve your credit profile — clear existing debt, file accounts on time, and reduce your credit utilisation before applying
Use a broker — they access rates from 30+ lenders simultaneously, and many business lenders only accept introduced business

Stress-Testing Your Repayments

Before committing, run the numbers at a 2% higher rate than quoted. If variable-rate lending rises, can the business still cover the repayment? A £200,000 loan at 8% APR over 5 years costs £4,056/month; at 10% APR it’s £4,247/month — a £191/month increase you should budget for.

How do I calculate business loan repayments?

In short