• Startups
  • November 13, 2014

An APR By Any Other Name...

By Lawbite Team

Talk to a Lawyer Free Legal Help
When we think of finance – commercial or personal – the first thing that comes to mind is cost, of course. However, there are upfront fees, completion fees, payment frequencies, variable rates and payment periods to confuse us. To solve this problem, financial gurus developed the concept of the APR – or annual percentage rate. The concept was first used to compare long-term mortgages and has remained a part of the lending world ever since. How useful is it? When comparing similar loans from different providers, having an APR is excellent! It turns all of the one-off fees, flat fees, interest rates and different payment frequencies into one annual cost; so choosing between mortgage providers becomes as easy as comparing hammers in a hardware store. However, much like tools, loans have different purposes. Just because the screwdriver costs less, doesn’t mean you should choose it over a hammer if you need to knock in a nail. Similarly, comparing APRs is not always the best way to assess the relative value of loans to your business. It can be helpful to pop on your marketing hat and try to measure the ROI (return on investment) of a loan. Most short-term loans have a purpose (marketing spend, stock purchase, new hire, etc…) that will generate a return. If you treat the cost of the loan as an investment, you can measure the ROI on your borrowed money and see what value, if any, your business will get from it. For example, you’re looking to get in some stock for Christmas and you can buy 1 000 plastic Santas in bulk at £10 000 (normally £15 000) and sell them for £20 000. You need a loan to get the deal, but will lose the discount price if it takes too long to fill out the paperwork and get approved. The bank loan is definitely cheaper in terms of APR, but what value would each loan add to your company? Unsecured loan ROI: Return = £20 000 – £10 000 = £10 000 Cost = £1 000 interest on loan ROI = £9 000 Bank loan ROI Return = £20 000 - £15 000 (non-discount price) = £5 000 Cost = £500 interest on loan ROI = £4 500 So in this instance, you’d actually get a better overall return from the more expensive loan. Certainly, this will not always be the case; and nothing in this suggests discounting the cost/APR associated with the loan. Sometimes, though, it’s worth looking past the simple cost of an investment, and measuring the investment’s value to your business – whether that’s an employee, a hammer or a loan.   Michael Bridgman - Fleximize. Fleximize provides innovative loans to help SMEs grow.       Journey further...
 

In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

Related Articles

Read more of our latest blog posts, featuring all the latest legal news, analysis and opinion from our expert lawyers.

blog image
  • By Lawbite Team
  • March 16, 2021
10 Steps every Start Up must take to avoid Legal 'Bear Traps'

Every start-up business needs the law. Unfortunately, many cut corners or worse still, ignore the legal side of their business all together. Here's...


Startups
blog image
  • By Lawbite Team
  • November 18, 2020
Is a personal guarantee weighing heavy?

Structuring your business as a limited company limits your personal liability and financial obligations, in relation to your business related debts...


Finance
blog image
  • By Lawbite Team
  • April 27, 2020
COVID-19 - UK Government Support to Help SMEs

This is certainly a unique time that business owners are facing throughout the UK, and the rest of the world. The Chancellor of the UK Government, ...


Funding, In The News, Finance, Coronavirus

LawBite can help you

LawBite is on a mission to provide business legal advice that is easier to access, clearer to understand and much cheaper. Our on-line legal advice platform can quickly connect you with expert business legal advice. Our friendly, highly qualified business lawyers, solicitors and mediators will give you the guidance and reassurance that comes from customised legal advice for small and medium sized business.

Whether you are bringing or defending a legal claim, outsourcing work, want a business contract review to ward off disagreements, talk to an expert trademark lawyer, resolve a contractual dispute with methods like mediation and arbitration, or getting your new company set up and on the right footing with a robust shareholder agreement and GDPR standards, we can help you succeed.

defend a claim

Talk to a Lawyer

Book a Call
defend a claim

Essentials Plan