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What does 20% APR mean on a business loan?
It is a price per year on the balance you still owe, not a percentage of what you borrowed.
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.
What does 20% APR mean on a business loan?
A 20% APR means the annualised price of the money is 20% of the outstanding balance, charged as it declines — not 20% of the original amount. Illustrative only — $50,000 over 60 months at a 20% nominal rate has a monthly periodic rate of 1.6667%, a payment of $1,324.69 and total interest of $29,481.40, with the first month's interest at $833.33. The same 20% over 12 months costs $5,580.76, because total dollars depend on the term as much as on the rate.
What the percentage is applied to
The balance you still owe, month by month, not the amount you originally borrowed.
Illustrative only — $50,000 at a 20% nominal annual rate. The monthly periodic rate is 20% / 12 = 1.6667%. In the first month, interest is 1.6667% of $50,000 = $833.33. The following month it is charged on a smaller balance, and so on until the balance reaches zero.
What it costs over a full term
Over 60 monthly payments the payment is $1,324.69, you repay $79,481.40 in total, and interest comes to $29,481.40. After twelve payments the balance is still $43,532.04, because the early payments are mostly interest.
Over 12 monthly payments the payment is $4,631.73 and total interest is $5,580.76.
Same 20%, same $50,000, and a $23,900 difference in dollars. The rate is a speed. The term decides the distance.
Nominal and effective are not the same 20%
An APR quoted the usual way is the periodic rate multiplied by the number of periods — a nominal figure. If you compound it instead, 1.6667% a month over twelve months is an effective annual rate of 21.94%.
The gap is small at 20%. On short, high-rate products it is enormous, which is why a comparison should state which convention it is using.
Where the 20% goes, month by month
- Month 1: $833.33 interest, $491.36 principal, balance $49,508.64.
- Month 12: $735.36 interest, $589.34 principal, balance $43,531.99.
- Month 30: $531.13 interest, $793.56 principal, balance $31,074.52.
- Month 60: $21.72 interest, $1,302.98 principal, balance zero.
Two things are visible in that sequence. After a full year of payments totalling $15,896, the balance has fallen by $6,468 — the rest was interest. And the loan only becomes cheap to hold near the end, which is precisely when people refinance it.
That matters for a decision you may face later. Refinance at month 24 and most of the interest on this loan has already been paid, while the new loan starts its own front-loaded schedule. Refinancing an amortising loan repeatedly is expensive in a way the rate never shows.
The same 20% on a revolver is a different amount of money
On an amortising loan, 20% is applied to a declining balance for a fixed number of months. On a line of credit it is applied to whatever you have drawn, for as long as you have it drawn.
So "20%" on a facility used in short bursts is a modest number, and "20%" on a facility kept fully drawn is not. Comparing a term loan with a line means comparing dollars over your expected usage pattern, not two rates.
Day count, and why 20% is sometimes 20.28%
Interest is normally computed as the annual rate divided by a day-count basis, multiplied by the actual days elapsed. A 365-day basis on $50,000 for 30 days gives $821.92. A 360-day basis gives $833.33.
Held for a full year at a constant balance, a nominal 20% quoted on a 360-day basis collects the equivalent of 20.28%. Small, real, and written in the note rather than mentioned in the conversation. Look for "actual/360" or "360-day year" and know which one you agreed to.
The version of "20%" that is not 20% at all
Some commercial quotes state interest as a flat percentage of the original amount for each year of the term, added on at the start and divided into equal payments. It is not the same product, and the word used is frequently the same.
Compute the rate that actually connects $50,000 of cash to those 24 payments and it is about 2.89% a month — 34.65% annualised.
A genuine 20% over 24 months would have a payment of $2,544.79 and total interest of $11,074.96. The add-on version costs $8,925 more on the same money over the same term, under the same two-digit number.
How to tell which you have been quoted: ask for total interest in dollars, then check whether it equals the rate times the principal times the years. If it does, interest is being charged on money you have already repaid.
What 20% does not tell you
What to do with a quote
- Ask for the amortisation schedule rather than the rate. Every question above is answered by it.
- Ask what reaches your account after fees, in dollars.
- Recompute the rate yourself on the cash received and that schedule — the calculators will run it. If your figure exceeds theirs, the difference is a list of charges, and the list is what to discuss.
- Ask whether there is a prepayment charge, and how interest is computed if you repay early. On an amortising loan, paying early genuinely reduces interest — which is the main structural difference between this and a fixed-cost advance, where it does not.
See also interest rate versus APR.
Where this applies
Related questions
What does 20% APR mean on a business loan?
A 20% APR means the annualised price of the money is 20% of the outstanding balance, charged as it declines — not 20% of the original amount. Illustrative only — $50,000 over 60 months at a 20% nominal rate has a monthly periodic rate of 1.6667%, a payment of $1,324.69 and total interest of $29,481.40, with the first month's interest at $833.33. The same 20% over 12 months costs $5,580.76, because total dollars depend on the term as much as on the rate.
Which funding products does this apply to?
Working Capital, Term Loan, Business Line of Credit, Business Credit Cards. 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.