APR vs. Total Cost of Capital: 

A Guide for Small Businesses 

For most business owners, the first question that comes to mind when exploring financing is “what’s the interest rate?”  Many client’s also ask: What is the difference between APR and the Total Cost of Capital? It’s important for business owners to understand what these terms mean and how they relate to their business funding program, so they can make responsible decisions about accessing capital.

Let’s look at these concepts together below.

What is APR?

APR (Annual Percentage Rate) is a standardized way of expressing the annualized cost of borrowing. It includes interest and fees and assumes the loan is held and amortized for a full year. It was originally designed to help consumers compare long-term financial products like credit cards and mortgages.

While APR is helpful in understanding loan costs from an annual perspective, it is critical to understand the following point: APR is not that same as Total Cost of Capital and can be misleading when applied to short-term business funding.

For example:

• A business takes $100,000 in funding and repays $112,000 over 4 months.
• The total cost is $12,000, or 12%.
• But because APR annualizes that cost of capital, it shows nearly 70% APR.

In reality, you’re paying 12%, not 70%. But the APR disclosure doesn’t make that clear, especially in short-term, one-time-use scenarios. This is why it’s more beneficial to look at the Total Cost of Capital when deciding which business funding products to use for your business.

What is Total Cost of Capital?

The total cost of capital tells you what you’re actually paying in dollars and cents. It answers the question every business owner really cares about:

“If I borrow money, how much will I actually be repaying?”

It’s simple, transparent, and easy to compare across funding options. And unlike APR, it doesn’t distort reality based on assumptions that don’t match your intentions or business needs.

Let’s use a familiar example: a home mortgage.

A 30-year mortgage at 6% APR might look great on paper. But over 30 years, a $500,000 home can cost more than $1,000,000 after interest. That’s why the Truth in Lending Act requires disclosure of the total repayment amount — because the APR alone doesn’t tell the full story.

With short-term business financing, the opposite is now happening.

A business may take a funding for short-term working capital with a 10–15% cost. If repaid in 4–6 months, the actual dollar cost is modest and reasonable for the speed, flexibility, and limited paperwork involved. But because of new regulations, funding sources are required to disclose an annualized APR, even when the program is 12 months or less.

The result? A short-term, lower-cost funding program suddenly looks more expensive — even though it’s not.

You Can See the Differences in Total Cost and APR in the Table Below:

As you can see, the total cost for a Mortgage or Business Credit Card is going to be exponentially higher than short-term business funding over the life of the product, despite the APR being lower than their short-term business funding counterparts.