Question 1

HOW IS AN INTEREST RATE OR AN APR CALCULATED?

Accepted Answer

Annualized interest rate is defined as the scheduled or periodic financing costs, expressed as a percentage of outstanding principal, and annualized. Interest rate does not include upfront costs charged to the borrower, such as fees related to origination, processing, or closing (although these costs must also be fully disclosed). It does include periodic costs charged to the borrower, such as monthly fees. For a rate to be referred to as an “APR” or “Annual Percentage Rate”, the rate must equal the total annualized cost of the financing, including scheduled financing costs as well as all such upfront costs.
If a rate is promotional or introductory, the term sheet should clearly state that the rate is subject to change and how the rate could change. If the loan does not amortize over its term, an equivalent annualized interest rate or APR should be calculated and disclosed. We believe that referring to other methods of calculating the cost of a loan as an interest rate, or simply as a “rate,” is likely to mislead a small business owner. 
For lines of credit or other open-ended types of financing, APR must include all upfront and anticipated fees, and be calculated with reasonable assumptions about use including assuming that the borrower draws the full amount on the origination date, and makes the minimum payments required.

Question 2

WHY REQUIRE APR? AREN'T THERE OTHER WAYS A LENDER CAN PRESENT PRICING? WHAT ABOUT QUOTING PRICING AS A "PERCENT" OF THE LOAN AMOUNT OR "FACTOR RATE" INSTEAD OF APR?

Accepted Answer

In order to make informed borrowing decisions, small business owners need pricing quoted in way that allows them to understand and compare their loan options. APR and annualized interest rates are standards that allow this comparison. 
Other novel forms of expressing the cost of a loan can make loans appear less expensive than they actually  are, and can be easily mistaken for interest rates. For example, the chart below shows how loans with quoted costs of “15% of the loan amount” may actually have an interest rate of 50% -- an easy but very costly mistake for a small business owner to make. Additionally, while quoting pricing as “15% of the loan amount” may reflect the total cost of a loan, it does not describe the financing effect on the borrowers’ cash flow. Take this example in the chart below:
 
The “percent of the loan amount” doesn’t give any indication of the big difference in monthly payment between a 6-month and 24-month term. Interest rate relates to both the total and periodic cost of a loan. Lower total cost and lower periodic cost both correspond to lower interest rates.

Question 3

IF THE TERM OF A LOAN IS SHORTER THAN ONE YEAR, WHY SHOULD THE RATE BE ANNUALIZED AS AN APR?

Accepted Answer

The rate should be annualized so that small business owners can effectively compare a loan offer with other loan options. An annualized rate is also helpful for small business owners to manage their cash flows because it considers the rate of repayment required by a loan. Faster repayment corresponds to a higher annualized interest rate, reflecting higher monthly repayments owed by the borrower.  Additionally, short-term lenders often encourage borrowers to re-borrow or renew their loans, and may even advertise these renewal rates as a sign of customer satisfaction. So, a short-term loan often becomes a medium- or long-term series of related loans to the same borrower. The borrower may never be informed of the true cost of such loans, taken together, even where an annualized rate would have been appropriate.

Question 4

IS APR SUITED TO COMPARE FINANCE COSTS ACROSS DIFFERENT LOAN TERMS?

Accepted Answer

Yes, that is the purpose of annualized rate. Take the example of a car lease. A 1-year car lease may have a lower total cost than a 2-year car lease…

Question 5

HOW CAN AN INTEREST RATE BE CALCULATED FOR CASH ADVANCES, WHICH DON'T TECHNICALLY CHARGE INTEREST?

Accepted Answer

Merchant cash advance providers set loan pricing and terms with a specific repayment period in mind. They must provide an APR using the projected repayment rate.

Question 6

WHY IS AN APR NEEDED IF BORROWERS ARE TOLD THE DOLLAR COST OF THE LOAN? ISN'T THAT WHAT REALLY MATTERS?

Accepted Answer

Dollar cost and monthly payment amount are meaningful only relative to a specific loan amount and loan term.  Dollar cost doesn’t allow borrowers to compare costs across different loan amounts or terms, or compare the typical costs of different lenders. APRs describe the cost regardless of loan size and term.

Question 7

WHAT CHARGES SHOULD BE DISCLOSED IN A TERM SHEET?

Accepted Answer

Every term sheet should disclose the APR, the interest rate if one is charged, all scheduled financing charges, the loan amount, payment amount and frequency, collateral requirements, and the cost of prepayment. Costs that are not charged to the borrower or that may not be incurred, such as late fees, are not required to be disclosed on the term sheet but must be made clear to the borrower before they accept a loan.

Question 8

HOW SHOULD THE EFFECT OF PREPAYMENT BE DISCLOSED?

Accepted Answer

Some loans require that a fixed amount be repaid to the lender, either in full or at a discount, regardless of the actual period in which the loan remained outstanding. If prepayment requires paying financing charges other than those associated with the specific term the financing was used for, the lender must disclose these financing charges as a prepayment penalty or fee. If the loan does not amortize and a fixed repayment amount is required, even if discounted, we believe it is deceptive to claim to a borrower that the loan has no prepayment penalty. At the time of payoff, if a fixed repayment amount will be charged, with or without a discount, the remaining contractual payments should be disclosed upfront as a prepayment penalty or fee.

SMALL BUSINESS BORROWERS BILL OF RIGHTS

Frequently Asked
Questions

GENERAL

WHEN AND WHY WAS THE SMALL BUSINESS BORROWER'S BILL OF RIGHTS DEVELOPED?

WHAT PRACTICES IS THE BORROWERS' BILL OF RIGHTS SEEKING TO ADDRESS?

WHAT TYPES OF FINANCING PRODUCTS DOES THE BORROWERS' BILL OF RIGHTS APPLY TO?

WHAT REGULATION CURRENTLY GOVERN BUSINESS LENDING?

SHOULDN'T SMALL BUSINESS OWNERS BE ABLE TO DECIDE WHAT TYPE OF FINANCING PRODUCT WORKS BEST FOR THEIR BUSINESS?

HOW DO BANKS FIT IN?

DON'T SOME LENDERS WHO DO NOT ABIDE BY THE PRACTICES IN THE BORROWERS' BILL OF RIGHTS ACTUALLY HELP BUSINESSES BY FUNDING BUSINESSES OTHER LENDERS DO NOT?

HOW WAS IT DECIDED WHICH ORGANIZATIONS WOULD PARTICIPATE IN ESTABLISHING THE BORROWERS' BILL OF RIGHTS?

HOW DOES AN ORGANIZATION DECIDE WHETHER TO BECOME A SIGNATORY OF AN ENDORSER?

HOW DO YOU ENSURE ACCOUNTABILITY AMONG SIGNATORIES AND ENDORSERS?

DO LENDERS, BROKERS, OR MARKETPLACES NEED TO ABIDE BY THE ENTIRE BBOR TO BECOME ENDORSERS, OR CAN THEY PICK AND CHOOSE WHICH SECTIONS THEY WILL ABIDE BY?

HOW IS AN INTEREST RATE OR AN APR CALCULATED?

WHY REQUIRE APR? AREN'T THERE OTHER WAYS A LENDER CAN PRESENT PRICING? WHAT ABOUT QUOTING PRICING AS A "PERCENT" OF THE LOAN AMOUNT OR "FACTOR RATE" INSTEAD OF APR?

IF THE TERM OF A LOAN IS SHORTER THAN ONE YEAR, WHY SHOULD THE RATE BE ANNUALIZED AS AN APR?

IS APR SUITED TO COMPARE FINANCE COSTS ACROSS DIFFERENT LOAN TERMS?

HOW CAN AN INTEREST RATE BE CALCULATED FOR CASH ADVANCES, WHICH DON'T TECHNICALLY CHARGE INTEREST?

WHY IS AN APR NEEDED IF BORROWERS ARE TOLD THE DOLLAR COST OF THE LOAN? ISN'T THAT WHAT REALLY MATTERS?

WHAT CHARGES SHOULD BE DISCLOSED IN A TERM SHEET?

HOW SHOULD THE EFFECT OF PREPAYMENT BE DISCLOSED?

TRANSPARENT PRICING & TERMS

NON-ABUSIVE PRODUCTS

WHAT IS DOUBLE DIPPING?

WHEN CAN A LENDER CHARGE A FEE IN REFINANCING A LOAN THAT IT PREVIOUSLY MADE?

RESPONSIBLE UNDERWRITING

WHY SHOULD LOANS REPAID THROUGH GROSS SALES REQUIRE A HIGHER STANDARD OF VERIFYING ABILITY TO REPAY? WHAT IS THE STANDARD FOR THAT VERIFICATION?

HOW SHOULD LENDERS REPORT TO CREDIT BUREAUS?

FAIR TREATMENT FROM BROKERS

WHAT IS THE ROLE OF A BROKER?

DO BROKERS WHO ABIDE BY THE BORROWERS' BILL OF RIGHTS REFER BORROWERS TO LENDERS WHO MAY NOT ABIDE BY THESE RIGHTS?

INCLUSIVE CREDIT ACCESS

ARE GENDER IDENTITY AND SEXUAL ORIENTATION PROTECTED BY EXISTING REGULAITIONS FROM DISCRIMINATION IN LENDING?

STAY UP TO DATE ON THE SMALL BUSINESS ACCESS TO CAPITAL AND FINANCIAL PROTECTION MOVEMENT

SMALL BUSINESS BORROWERS BILL OF RIGHTS

Frequently Asked Questions

GENERAL

WHEN AND WHY WAS THE SMALL BUSINESS BORROWER'S BILL OF RIGHTS DEVELOPED?

WHAT PRACTICES IS THE BORROWERS' BILL OF RIGHTS SEEKING TO ADDRESS?

WHAT TYPES OF FINANCING PRODUCTS DOES THE BORROWERS' BILL OF RIGHTS APPLY TO?

WHAT REGULATION CURRENTLY GOVERN BUSINESS LENDING?

SHOULDN'T SMALL BUSINESS OWNERS BE ABLE TO DECIDE WHAT TYPE OF FINANCING PRODUCT WORKS BEST FOR THEIR BUSINESS?

HOW DO BANKS FIT IN?

DON'T SOME LENDERS WHO DO NOT ABIDE BY THE PRACTICES IN THE BORROWERS' BILL OF RIGHTS ACTUALLY HELP BUSINESSES BY FUNDING BUSINESSES OTHER LENDERS DO NOT?

HOW WAS IT DECIDED WHICH ORGANIZATIONS WOULD PARTICIPATE IN ESTABLISHING THE BORROWERS' BILL OF RIGHTS?

HOW DOES AN ORGANIZATION DECIDE WHETHER TO BECOME A SIGNATORY OF AN ENDORSER?

HOW DO YOU ENSURE ACCOUNTABILITY AMONG SIGNATORIES AND ENDORSERS?

DO LENDERS, BROKERS, OR MARKETPLACES NEED TO ABIDE BY THE ENTIRE BBOR TO BECOME ENDORSERS, OR CAN THEY PICK AND CHOOSE WHICH SECTIONS THEY WILL ABIDE BY?

HOW IS AN INTEREST RATE OR AN APR CALCULATED?

WHY REQUIRE APR? AREN'T THERE OTHER WAYS A LENDER CAN PRESENT PRICING? WHAT ABOUT QUOTING PRICING AS A "PERCENT" OF THE LOAN AMOUNT OR "FACTOR RATE" INSTEAD OF APR?

IF THE TERM OF A LOAN IS SHORTER THAN ONE YEAR, WHY SHOULD THE RATE BE ANNUALIZED AS AN APR?

IS APR SUITED TO COMPARE FINANCE COSTS ACROSS DIFFERENT LOAN TERMS?

HOW CAN AN INTEREST RATE BE CALCULATED FOR CASH ADVANCES, WHICH DON'T TECHNICALLY CHARGE INTEREST?

WHY IS AN APR NEEDED IF BORROWERS ARE TOLD THE DOLLAR COST OF THE LOAN? ISN'T THAT WHAT REALLY MATTERS?

WHAT CHARGES SHOULD BE DISCLOSED IN A TERM SHEET?

HOW SHOULD THE EFFECT OF PREPAYMENT BE DISCLOSED?

TRANSPARENT PRICING & TERMS

NON-ABUSIVE PRODUCTS

WHAT IS DOUBLE DIPPING?

WHEN CAN A LENDER CHARGE A FEE IN REFINANCING A LOAN THAT IT PREVIOUSLY MADE?

RESPONSIBLE UNDERWRITING

WHY SHOULD LOANS REPAID THROUGH GROSS SALES REQUIRE A HIGHER STANDARD OF VERIFYING ABILITY TO REPAY? WHAT IS THE STANDARD FOR THAT VERIFICATION?

HOW SHOULD LENDERS REPORT TO CREDIT BUREAUS?

FAIR TREATMENT FROM BROKERS

WHAT IS THE ROLE OF A BROKER?

DO BROKERS WHO ABIDE BY THE BORROWERS' BILL OF RIGHTS REFER BORROWERS TO LENDERS WHO MAY NOT ABIDE BY THESE RIGHTS?

INCLUSIVE CREDIT ACCESS

ARE GENDER IDENTITY AND SEXUAL ORIENTATION PROTECTED BY EXISTING REGULAITIONS FROM DISCRIMINATION IN LENDING?

STAY UP TO DATE ON THE SMALL BUSINESS ACCESS TO CAPITAL AND FINANCIAL PROTECTION MOVEMENT

Frequently Asked
Questions