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How do I express a flat fee as a rate?
The shorter the term, the more a flat fee is worth. The quick scaling method understates it by about half.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
How much does a 3% fee actually cost me as an interest rate?
Solve for the rate on the cash you actually received rather than dividing the fee by the loan amount. Illustrative only — a $3,000 fee deducted from $100,000 repaid over six monthly instalments is worth 10.5% annualised, over twelve months 5.7%, and over twenty-four months 2.9%. The quick method of scaling 3% by twelve over the term gives 6%, 3% and 1.5%, understating the cost by roughly half in each case because you never hold the full amount for the full term.
The method
A fee deducted at funding reduces the cash you received without changing what you repay. So treat it exactly like any other cost: solve for the periodic rate that makes the payments equal the cash, then multiply by the number of periods in a year.
Worked
Illustrative only — $100,000 with a $3,000 fee deducted, so $97,000 reaches your account, and no stated interest at all.
- Repaid in 6 monthly instalments of $16,666.67: annualised 10.5%, an effective annual rate of 11.1%.
- Repaid in 12 instalments of $8,333.33: annualised 5.7%.
- Repaid in 24 instalments of $4,166.67: annualised 2.9%.
One fee, three very different prices, because a fee is a fixed dollar amount and a rate is a price per unit of time. Squeeze the same $3,000 into six months and it costs nearly twice as much per year as it does over twelve.
Why the shortcut is wrong
The quick version scales the percentage: 3% x 12/6 = 6%, or 3% x 12/12 = 3%, or 3% x 12/24 = 1.5%.
Each is roughly half the right answer. The reason is the same as with any amortising schedule — you do not hold $97,000 for the whole term. You are handing it back from the first payment, so the fee is charged against an average balance well below the starting figure.
Use the shortcut only as a floor: the true cost is always higher.
The one case where the shortcut is right
Scale it up and the shortcut works exactly once: when there is a single repayment at the end.
Illustrative only — $97,000 reaches you and you repay $100,000 in one payment at month six. You held the whole sum for the whole term, so nothing is being repaid early and there is no average balance to correct for. The answer comes out at about 6.1% nominal annually, against the shortcut's 6.0%. Close enough to be the same number.
Every instalment structure sits between that case and nothing, which is why the shortcut understates by roughly half on level payments and by less as the payments get more back-loaded. If an offer has a balloon, interest-only period or uneven schedule, the shortcut is somewhere in between and you have to solve it properly.
Netted versus added to the balance
A fee can be taken out of what you receive or added to what you repay, and the two are not the same deal.
Illustrative only, on the same $100,000 and the same $3,000:
- Netted. $97,000 reaches you, you repay $100,000. Over 12 instalments: 5.7% nominal annually.
- Added. $100,000 reaches you, you repay $103,000. Over 12 instalments: 5.5%.
Over 6 months the pair is 10.5% against 10.2%; over 24 months they converge at about 2.9%. The netted version always costs more, because the fee is money you repay and never held. The difference is small on a long term and it is real, and a quote that does not say which structure applies has left out the input.
What to ask for
Three things, in dollars, in writing.
- The cash that will reach my account, after every deduction, as a number.
- The total of all payments, as a number.
- Whether the fee recurs — at renewal, per draw, annually — and at what amount.
Then divide cost by cash received and set it against the months. If the fee recurs, do it again on a two-year view, because a fee charged at every renewal is not a one-off cost and a business that renews twice a year is paying it twice a year.
Where this matters most
The trap in a renewal quote
A fee expressed as a percentage of the new facility, charged each time you renew, behaves like an annual charge that you never agreed to as one.
Illustrative only — a $50,000 line with a 1.5% draw fee, drawn and cleared four times in a year, costs $750 each time: $3,000 for the year, on a facility you may never have had fully outstanding. If your average drawn balance across that year was $18,000, the fee alone is worth about 16.7% of the money you actually used, before any interest.
That is not an argument against the product. It is an argument for asking two specific questions: how often will this fee be charged, and what was my average drawn balance last year. The second one you can answer yourself from your own statements, and it converts a fee schedule into a price.
The check
Add the fee to the total you repay, subtract the cash you received, and look at the dollars first. Then annualise if you need to compare structures. On the example above, the dollars are $3,000 either way — it is only the rate that moves, and it moves because time moved. The calculators will run the conversion on your own figures, and origination fees taken out of proceeds versus added to the balance covers what changes when the fee is financed instead of deducted.
Where this applies
Related questions
How much does a 3% fee actually cost me as an interest rate?
Solve for the rate on the cash you actually received rather than dividing the fee by the loan amount. Illustrative only — a $3,000 fee deducted from $100,000 repaid over six monthly instalments is worth 10.5% annualised, over twelve months 5.7%, and over twenty-four months 2.9%. The quick method of scaling 3% by twelve over the term gives 6%, 3% and 1.5%, understating the cost by roughly half in each case because you never hold the full amount for the full term.
Which funding products does this apply to?
Working Capital, Term Loan, Business Line of Credit, Invoice Financing. Each has its own page listing the funders in this directory that offer it and what each one publishes about its terms.
Are the figures here quotes?
No. Every worked example is labelled illustrative and exists to show the arithmetic. What a particular lender charges is on that lender's page, where it publishes it at all.
Who writes this?
The Find Me Funders research desk. Some drafting is AI-assisted, and every page that is says so at the top, including whether a person has checked its claims yet.
How do I know a figure here is right?
Where a page carries the green notice, its claims were checked against the sources listed at the end and a reviewer is named. Where it carries the amber one, nobody has verified it yet and you should confirm anything you plan to act on.
Are the examples real deals?
No. Every worked example is labelled illustrative and exists to show the arithmetic. What any particular lender charges is on that lender's page, where it publishes it.
Why do you never say what a typical rate is?
Because we cannot source it. A market average assembled from lenders who do not publish prices is a guess with a decimal point on it. Where a lender publishes a figure, we show that figure and say where it came from.
Is this financial or legal advice?
No. It is general information about how these products work. Outcomes depend on your contract and your state, and a lawyer or accountant licensed where you are is the person to ask about your situation.
Can I reuse this content?
Quote a paragraph with a link back. Do not republish whole articles.