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Understanding APR for short-term business borrowing UK: what the number really means
Understanding APR on a UK short-term business loan: why the annualised rate looks alarming, what it actually measures, and which figures tell you the real cost.
If you have ever looked at a short-term business loan and seen an APR that runs into the thousands of percent, you would not be alone in wondering whether something has gone wrong. Nothing has gone wrong. The APR figure on a short-term product is technically correct and it is also technically meaningless as a measure of what you will actually pay. This article explains why, and what to look at instead.
What APR is, and what it is for
APR stands for Annual Percentage Rate. It is a standardised way of expressing the cost of borrowing as if the loan were spread evenly across a year, so that products on different terms can be compared on the same yardstick. It was designed for borrowing that runs across months and years — a mortgage, a car loan, a personal loan — where saying "the cost over a year is X" is a useful, intuitive figure.
Why short-term lending breaks the APR yardstick
Short-term borrowing — a 30-day loan, a 60-day bridging loan — runs for far less than a year. To express its cost as an annualised figure, you have to mathematically project a single-cycle cost across twelve cycles. The result is a figure that no borrower will ever actually pay, because they will not borrow that £ for that long. A £300 loan over 30 days at a typical short-term rate might cost £40 in interest + fees — a meaningful £ figure. The APR of that loan, calculated as if it ran for a year, might land at 1,200%. The £ figure and the % figure are both correct; the % figure is just not measuring what a borrower needs to know.
What to look at instead
For short-term borrowing, the figures that actually matter are:
- The £ total cost of the credit — the sum of all interest + fees you will pay across the life of the loan. This is the number on the Key Information Sheet and it is the number you should compare across products.
- The £ per repayment — what comes out of your account each week / fortnight / month. This tells you whether the repayment schedule actually fits the company's cashflow.
Where APR is still useful
APR is still the right comparison tool for two situations: between two products of similar duration (e.g. two 12-month business loans) and between a short-term product and a longer-term alternative if you're going to draw the short-term repeatedly. In that second case, the APR helps surface that repeatedly drawing a short-term loan would cost more than a structured longer-term facility — a genuinely useful signal.
The honest summary
The headline APR on a 30-day loan is not the cost of that loan. The £ figure is. Read both; compare on the £; question the APR only when you're comparing across products with similar durations or considering repeat use. The business loans calculator shows both figures so you can see how they relate for any specific borrowing.
Common questions about APR and short-term business borrowing
Why is the APR on a short-term business loan so high in the UK?
APR is calculated by projecting the cost of a single loan cycle across a full year. A loan that runs for 30 days has its cost multiplied by twelve (or compounded) to produce the annual figure. Because the real cost per cycle is compressed into a very short period, the annualised figure can appear extremely high — even on loans where the actual £ total cost is quite modest. The APR is not wrong; it just isn't measuring what a short-term borrower needs to know. Compare the £ total cost of credit instead.
What should I compare instead of APR when looking at short-term business loans?
For short-term borrowing, compare the £ total cost of credit — the combined interest and fees you will actually pay — and the £ per repayment instalment. Also look at the total cost cap: the maximum you can ever pay as a percentage of the amount borrowed. These figures are shown on the Key Information Sheet you receive before signing and on our business loans calculator.
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