Blog #8: The Least important business finance number: “Interest Rate”?

Every time someone starts a conversation by asking “what is your interest rate” I should just hang up.  The chances of me doing business with them are slim.  They are either looking for a “bank like” rate and shopping around or I will explain the facts and never get a call back.

I find that a tough question to deal with because if I start with a low number it seems deceptive. If I tell them the truth, they might hang up.  I could give them a range, but it would be a wide one and I feel guilty if I do not give them a number at all.

Simple interest is easy to understand but compound interest is a more complex calculation where interest can be charged daily, weekly, monthly, quarterly, or even annually.  The difference between each can be significant.

The Annual Percentage Rate (APR) is supposed to include all charges assessed by the lender including origination, processing, appraisal, and transfer fees.  It may or may not include items such as audits, collateral management fees, reporting expense, wiring fees or legal costs.

I encourage business owners to focus on the true cost of funds, how long they are borrowing and how will it be paid back.   Will the money solve the challenge it is intended and is it affordable?  Terms and conditions need to be understood fully.  An appreciation for average cost of capital is useful.

Business finance professionals like ourselves should be clearer when we talk about “the interest rate”.  We need to explain how a rate is calculated, all of the costs involved and how everything relates to risk. You will create trust and possibly a good working relationship and hopefully one less person shopping for the lowest number.