What to Know about Short-term Lending Fees

In recent years, there has been an emergence of access to non-dilutive, short-term financing options. While these can provide crucial access to capital needed for short-term projects, these simple solutions can prove much costlier from a finance perspective than meets the eye.

Many short-term financing options are structured as flat rate “fees” rather than a traditional interest rates. A mistake we see is borrowers comparing the fee directly to an interest rate. However, doing so forgoes the financial principle of “time value of money” - this refers to the idea that a dollar today is worth more than a dollar tomorrow and does not take into account how much of the loan has been amortized. So the quicker a loan is paid back, the more expensive it is to finance.

Take for example a $250,000 loan that is paid back over 12 months with a 9% “fee.” The total amount to be paid back would equal $272,500 ($250,000 * 1.09) in equal installments of $22,708 ($272,500 / 12). Using an internal rate of return calculation (this takes time value of money into consideration) the comparative interest rate is closer to 17.6%.

More Growth Finance Terms
View All
Link Arrow