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The Top Small Business Funding Options for 2019

small business funding

While small businesses are the lifeblood of the global economy they definitely face their fair share of challenges, particularly when it comes to small business funding.


A lot of new entrepreneurs just aren’t used to handling this kind of cash flow, aren’t sure of how to cover taxes or payroll, and find wrangling with the intricacies of small business financing on a day-to-day basis – as well as big picture – to be a bit of an uphill challenge.


Sadly, oftentimes the small business funding problems cripple or even close businesses before they have a chance to get squared away.


According to the US Small Business Administration 30% of all businesses fail because they run out of money. Traditional lenders aren’t all that friendly to small businesses, either, only approving around 26.9% of all small business loans that are applied for.


Worse, 45% of all small business owners are unaware of the fact that they have a business credit score and aren’t taking advantage of funding options or packages that may be available to them.


To help you sort out your own funding and to hit the ground running with financing packages that makes sense for your business we’ve put together this quick guide.


Let’s dig right in!


Sneak Peak at the Top Funding Options for small business Available


For starters, it’s critical to know that you are going to have a whole host of funding options available to you as a small business owner – including options you may not have even known existed to begin with.


As a quick overview, these are just some of the funding solutions you might choose to leverage moving forward:


•           Traditional Loans

•           SBA Lending Packages

•           Business Lines of Credit

•           Business Credit Cards

•           Equipment Financing Options

•           Invoice Financing Packages

•           Short Term Loan Packages


Below we are going to go little deeper into everything that these financing solutions have to offer you as a smart and savvy this owner today.


Starting Your Search Right


The overwhelming majority of small business owners that seek out funding for their operation are going to do so when they “just feel like they need to” – which may or may not be the right move to make.


Obviously, as an entrepreneur with your finger on the pulse of your business you’ll have a good idea of when financing is needed. But there’s a lot of leverage in choosing the right financing packages for your business ahead of time (before you really need them) to make sure that you can capitalize on time sensitive or surprise opportunities.


Almost never too early to begin searching for financing options and getting all of your ducks in a row, so to speak.


Breaking Down Debt vs Equity Funding


While there are a myriad of small business funding and financing options available (as we highlighted above and will dive deeper into below), everything available kind of breaks down into two different groups – debt funding versus equity funding options.


Choosing the right solution for your needs is a big piece of the puzzle.


Debt Funding


Debt funding for your small business basically works the same way that traditional loans do, in that you take on debt to finance your operation – borrowing money and agreeing to repay it (plus interest) over a very specific block of time.


For the overwhelming majority of small business owners this is the right way to go. Debt funding options for small businesses are usually available for most kinds of businesses, entrepreneurs with average credit, and many of these options can even be taken advantage of online.


Equity Funding


Equity funding, on the other hand, is a way to boost your cash flow and get any injection of capital by selling off ownership of your company. You basically take on investors, give them a portion of your ownership (as well as some control), and in return you get the capital you need.


These kinds of options are not ideal for small business owners, particularly since the biggest and most influential investors in this line of work aren’t going to be looking to offer this kind of funding for anything they don’t see as a homerun hit potentially worth millions and millions of dollars.


You also give up a lot of control and a lot of ownership of your company and should you turn your business into something really big that can end up costing you millions (if not more).


Choosing Your Small Business Funding Options


Regardless of how you go about leveraging small business funding options, choosing the financing packages you pick for your business will come down to a variety of different factors.


These factors include (but aren’t limited to)


  • Your industry and whether or not there is a predisposition to offering one kind of financing package or another to businesses in this industry
  • The network that you have access to, particularly when it comes to connections with influential investors or lending institutions
  • The specific amount of funding that you are looking to take advantage of to begin with
  • The timeline that you are looking to receive funding on as well as the timeline you have for repayments
  • The overall amount of control you want to keep exerting on your business, today, tomorrow, and years into the future


… And that’s just the tip of the iceberg.


You really need to think about how you want to proceed when it comes time to get small business funding, and you need to take both a short-term and a long-term approach before you jump right in.


This is often going to be a high stress and anxiety ridden decision to be sure, but or time and space you have – and the more options you consider – to make the right decision for your business the better off you are going to be.


Highlighting Debt Business Funding Options


Traditional Loans


Traditional small business loans are the easiest to understand, in that they are so similar to consumer style loan (car loans, personal loans, etc.) that the odds are pretty good that you’ve already taken advantage of similar lending packages in the past.


These kinds of low are great for business owners that want to maintain a lot of ownership, don’t want to give up any equity, and are looking to borrow money over a longer block of time but want to manage their monthly repayment schedule as well.


SBA Lending Packages


The US SBA is very friendly when it comes to offering small businesses long-term, low cost loans and financing packages – but the process of getting your hands on these lending packages can be a bit more involved than a lot of people realize at first.


Borrowers are going to need to have rock solid credit before they begin the application process, will have to have owned their business for at least a year already, and are actually going to have to go through traditional lenders to get the financing they are after – though the US SBA does guarantee these loans through the lender, which makes getting them a whole lot easier.


Anticipate a mile of paperwork to fill out before you get approval as well as a long and drawn out application process.


Business Lines of Credit


Business lines of credit are maybe the most versatile and flexible of all the different small business funding packages out there, giving you a lot of opportunity to use cash and capital to build and grow your business as you see fit without a lot of distractions on how you use that money.


Any business that has unpredictable or you regular cash flow, seasonal capital, or just want a lot of flexibility to do what they need to on a spontaneous basis – shifting gears when new opportunities arise or change – should look into these kinds of lending packages.


Business Credit Cards


There isn’t a lot of surprise to the way that business credit cards work.


You’re talking about the same kind of plastic you likely have in your pocket already, though the terms, limits, and interest rates are almost always going to be quite a bit different than the plastic you’re using in your personal life.


Business owners that do not need a pile of capital to work through when it comes to small business funding, do not need immediate access to giant reserves of cash, and are comfortable using faster to pay for business expenses and the like are really going to find these kinds of offers attractive.


It’s never a bad idea to look for business credit cards that offer some sort of reward system, either. With the kinds of dollar figures that run through these types of cards you can begin to rack up points and benefits in a hurry.


Equipment Financing Packages


Equipment financing packages are great for small businesses that have equipment on hand and other assets that can be leveraged for financing, helping you to purchase the equipment and materials you need to upgrade or overhaul your business while securing loans through the assets you already have on hand.


Kinds of financing packages for businesses can be a little bit restrictive in how they are used, however. You’ll need to drill down into the ins and outs of your specific arrangements before you pull the trigger on this kind of move.


Different offers will have different restrictions attached to them so be sure that you are really sure of what you’re getting into the for you sign on the dotted line.


Invoice Financing Packages


One of the biggest challenges you’ll have as a small business owner is waiting around for your clients to actually pay you after they have been invoiced – a challenge that every small business on the planet is going to have to wrestle with far more often than they’d like.


Invoice financing small business funding packages can help you leverage those unpaid invoices to get cash and capital that you need ASAP, using the actual invoices themselves as collateral and getting in advance on those invoices to keep your cash flow a lot more consistent.


One of the big benefits here is that any business with invoices can take advantage of these kinds of lending packages regardless of their credit score, credit history, or overall credit worthiness. The invoices themselves are more than enough to get the ball rolling, giving you an opportunity to use financing packages even if you thought traditional opportunities were closed off.


Short Term Loan Packages


If you are on the hunt for cash and capital quickly you can expect to pay a premium to take advantage of these kinds of lending services.


Short-term loans kind of sit in that sweet spot between speed and overall cost, giving small business owners an opportunity to get their hands on the money they need when they need it most without having to mortgage their future financial situations along the way.


These kinds of loans are very flexible, offer almost instant payouts, and are usually pretty affordable – basically acting like a condensed down version of more traditional term loan packages like the ones we made mention of earlier.


Getting Creative with Your Funding Options


Creative small business funding options are available as well and you shouldn’t overlook them, even if they don’t appear to be quite as “old-school” as more traditional lending services we’ve already discussed.


Small business funding grants are a great way to get a lot of cash and capital you wouldn’t have had access to otherwise, but you’ll need to set aside plenty of time to apply for them and go through the entire (often grueling) grant process to land the capital they provide.


Crowdfunding solutions are becoming really viable these days, already one of the most popular channels for small business funding for startups and new entrepreneurs that are tech savvy. This is another approach you might want to go down if you’re willing to take on the risk that it entails.


Finally, you can always reach out to your personal network (your friends and family members) that may be willing to help you make your entrepreneurial dreams come true.


It can be a bit risky to mix business and family or other important relationships, but plenty of people have been able to make it work – and have credited these kinds of lending services with allowing them to make their financial future a reality.


Closing Thoughts


At the end of the day, there’s no simple formula for calculating exactly how you should approach small business funding for your specific needs.


You’ll instead have to really assess where you are as a business, what your cash flow situation is, the needs you have to take care of with this financing, and the flexibility of not only how you can use the funding but how you can go about repaying the loans moving forward.


Hopefully we’ve been able to shine a little bit of light on the best small business funding options available today and have helped you make the right choices for your business going forward!



1099 vs. W2 Comparison: Which Is Best When Hiring for Your Business?


Do you know which you should choose, W2 vs. 1099?

Employee vs independent contractor? Does just thinking about the choice make your head spin? Don’t worry, we’ve got you covered. 

In some ways, business was easier when it was just you. 

Growth is a good thing and it means your business is going places. 

However, there are a lot of technical and administrative headaches you have to deal with along the way. One of those things is figuring out how to categorize the people who are working for you. 

It was once much easier to figure this out. Virtually all employees were paid on W2s. Done and done.

But times have changed, and now it’s much more common to hire remote employees and freelancers for various business duties such as marketing, outreach, SEO, and even for basic secretarial jobs such as managing email and creating spreadsheets. 

This has made it much harder to know whether those you have working for you should be 1099 independent contractors or more traditional W2 employees.

So, what is the difference? Which type of worker is a better fit for your business? And of those new employees you’re taking on now, how do you know if you should be providing them a 1099/W-9 or a W-2 form?

In this guide, we’ll talk about all of that and more. We’ll be covering:

  • What is the difference between a 1099 vs. W2 employee?
  • Which is a better fit for your business? 
  • Pros and cons of both
  • How do you know if an employee should be 1099 vs. W2? 
  • And what forms do you need for each?

Choosing whether to center your business around utilizing independent contractors or traditional employees (or a mix) is an important decision that affects not only your business process but your financial model. 

So, it’s important to take the time to consider which is best for you. 

What is the difference between a 1099 vs. W2 employee?

To clear up any confusion, the first thing to understand about 1099 vs. W2 is that it’s strictly a matter of tax classification. 

In fact, 1099 and W2 refer simply to different tax forms, a 1099 employee being one paid on 1099 (typically, a 1099-MISC form) and a W2 employee one which is paid on a W2.

However, what makes an employee 1099 or W2 is what is important. And that’s what we’ll be talking about in this section. 

Not only because each type of worker operates differently, and that affects your business in several ways, but also because failing to classify your employees correctly can lead to tax fines and other fees.

Let’s start with breaking down the basic differences between a worker or employee on 1099 vs. one which should be paid on W2.

What is a 1099 worker?

Technically, a 1099 employee isn’t an employee at all, but an independent contractor. A 1099 worker typically provides a service to your company in exchange for payment.

The most commonly seen 1099 worker is likely your typical accountant. 

Accountants sometimes work for a single client, but often they have several different clients. They either spend only a portion of their week in the office of each client– handling payroll, etc.– or work from their own office full-time depending on what they’re hired to do. 

This is by no means the only example of a 1099 contractor, though. A freelance webmaster could also perform work for you on a contract, for example.

Independent contractors tend to be hired for a specific period of time to do a particular job. However, as we just talked about in the case of an accountant or webmaster, that’s not necessarily the case. 

Because independent contractors are independent, they may also have their own team who help them complete whatever job they’re hired to help you with. 

Defining characteristics of a 1099 worker:

  • A 1099 independent contractor controls how the work will be done. If you as the employer controls not only the result but also what will be done and how, that worker is an employee. 
  • A 1099 independent contractor pays all their own taxes, including self-employment taxes. You’re not responsible for paying taxes with 1099 contractors. 
  • A 1099 independent contractor can’t work a traditional 9-5 shift. They also often complete their work in their own place of business (i.e. remotely). 
  • A 1099 independent contractor is not eligible for employer benefits. Just as 1099 contractors pay their own taxes as self-employed people, they also must pay for their own employer benefits as business owners. 

EXCELCAPITAL - w2 employee

What is a W2 employee?

A W2 worker is the traditional employee you typically think of in the case of any business. 

A W2 worker is a salaried employee who collects employer benefits such as health insurance and retirement and works a typical 9-5 shift. They work for your company and are given a wage dictated by you (in accordance with your state’s minimum wage laws). 

Unlike 1099 contractors, you’re responsible as an employer to withhold your W2 worker’s state and federal employer taxes, Medicare, and Social Security. 

You’re also responsible for providing them the supplies they’ll need to do their job, be it office supplies, equipment, or various tools. 

In the case of a 1099 contractor, the work they do for you is decided based on a contractor and you, having signed that contract, must work with that contractor based on that agreement.

However, in the case of a W2 worker, it is your right to let go of any employee based on any one of several valid reasons such as performance, fraud, or a failure to appear. 

Defining characteristics of a W2 employee:

  • A W2 employee is a salaried employee who works for you. You dictate not only the results of their work but how they perform that work. 
  • A W2 employee has all their tax payments withheld by their employer. You as their employer withhold Medicare, Social Security, and state and federal employment taxes.
  • A W2 employee can be let go for poor performance or other reasons. They do not work and collect payment based on a contractor like 1099 workers but are employed by your company and can be let go for valid reasons.

1099 vs. W2: Which is a better fit for your business? 

Now that you understand clearly the difference between a 1099 independent contractor and a W2 employee, it’s time to start thinking about which is a better fit for your business.

More than ever, many types of businesses are operating entirely online. 

In that case, it may make sense to utilize mostly 1099 workers on a regular basis while others for specific projects and only have a few regular employees (if any). That way, you save on taxes, supplies, and office space

However, your business may require more direct communication, retail space, or something else that is more conducive to typical on-location W2 employees, so what is best for you depends on several factors. 

Here are the pros and cons of 1099 and W2 employees: 

EXCELCAPITAL - w2 employee vs 1099

1099 Pros and cons

The primary benefit of 1099 workers is their reduced cost, but there are downsides to independent contractors as well. 

Let’s look more closely at the pros and cons of 1099 independent contractors:

1099 Pros

  • You don’t have to pay unemployment insurance: Because 1099 workers aren’t employed by you, if you “fire” an independent contractor, they can’t collect unemployment. This is a big expense as it typically amounts to 10% of an employee’s salary. However, keep in mind that there is a caveat to this if you have a mix of W2 and 1099: in many states, such as California, if you have a single ex-employee on unemployment you have to pay the full unemployment insurance amount. 
  • You don’t have to pay income or payroll taxes on behalf of your 1099 workers: You’re not responsible for paying taxes on behalf of 1099 contractors, including state, federal, Medicare, Social Security, or payroll taxes.
  • A 1099 independent contractor doesn’t get employer benefits. Just as 1099 contractors pay their own taxes as self-employed people, they also must pay for their own benefits as business owners, meaning savings for you. 
  • Easier to hire specialized expertise for a limited period of time: Sometimes, you need a task done for a specific period of time or a single project, so you don’t need another full-time employee. An independent contractor is designed for this, as you can make a contract for one, they complete the work, and then you’re done, helping you save more time and money while getting someone that likely has more experience with the task as well.
  • Reduced legal risk: Because independent contractors are not true employees, they don’t qualify for workers compensation and can’t file a wrongful termination claim in most cases. 

1099 Cons

  • They’re less committed and less familiar with your company: There’s a special kind of dependability that you get with W2 employees that you often don’t get with independent contractors. After all, they don’t work in the office throughout each day and aren’t entrenched in the daily goings-on of the business. 
  • They’re specialized: As we talked about, an independent contractor is likely an expert in their field, but that’s all they offer. A 1099 contractor can’t and likely won’t shift gears for you because they only offer whatever their services are. 


W2 Pros and cons

Like 1099 independent contractors, W2 employees also have their unique pros and cons. Here are the most notable: 

W2 Pros

  • They’re more dependable, being on-location “9-5”: Your business hours may be different from the typical 9-5, but the point still stands– W2 employees are more dependable because they’re in the office all the time. Independent contractors can, at times and depending on the person, be hard to get a hold of when you need them. They’re also less familiar with your business and brand. 
  • They’re more committed: W2 employees don’t consider you a “client” of theirs like independent contractors typically do. You’re their employee, typically their only employee, so they’re much more committed to you than a 1099 worker will typically be to your company. 
  • They can shift gears and help take duties off your back: Independent contractors are designed to offer their specific services and that’s it. However, a long-term employee can be trained to take on many different roles and duties over time, even helping take certain things off your back over time as well. 

W2 Cons

  • W2 employees cost more than independent contractors: In exchange for the dependability, commitment, and familiarity you get with in-office employees, they do typically cost more. With W2 employees, you need to pay income taxes, unemployment insurance, and benefits among other things. 
  • They’re typically less specialized, therefore not as well suited for certain tasks: W2 employees aren’t typically specialists. This isn’t always the case, but independent contractors are often experts in their field, so they may be better suited for certain tasks. 

When to choose W2 vs. 1099? 

There’s a lot that goes into choosing between W2 employees vs. 1099 contractors (and when, because every job your business needs done is different). 

For that reason, it may not yet be clear which you should choose for a certain situation. 

As you can tell from the pros and cons above, it all depends on what you need. 

If you own a tech company and want to be able to handle more clients, you’ll probably need a W2 employee who can work with you to split appointments and complete jobs. 

A retail business is the same deal, you need people that are there from open to close to help you run the business.

However, if what you need is someone who is an expert to complete a big job, such as setting up a server in your office, market your service online, or complete your bi-weekly payroll, a 1099 independent contractor might be a better fit. 

EXCELCAPITAL - w2 employee vs 1099

These are just a few examples, but hopefully, they paint a clearer picture of the kind of situations where you would choose one vs. the other. 

Sometimes, you’ll want someone on W2 to help you handle the daily workload and take on some of the tasks you have to do in the shop each day. Other times, you might need someone to help fix up the storefront, ideal for a 1099 contractor. 

How do you know if an employee should be 1099 vs. W2 ?  

What if you already have an employee, someone new, whom you’ve hired to handle certain things around the business, and you aren’t yet sure what they classify as? 

It’s important to know how to classify someone doing work for your business. To wrongly classify an employee who should be W2 as 1099 (perhaps in an effort to avoid paying for insurance or taxes) could mean steep fines and penalties from the IRS, so you don’t want to mess around. 

So, 1099 vs. W2 , which is better for your new employee? Let’s look at what Uncle Sam says on the matter.

According to the IRS, there are two points for you as a business owner to keep in mind when figuring out how to classify your workers: 

  1. Control. The relationship between a worker and a business is important. If the business controls what work is accomplished and directs how it is done, it exerts behavioral control. If the business directs or controls financial and certain relevant aspects of a worker’s job, it exercises financial control. This includes:

    • The extent of the worker’s investment in the facilities or tools used in performing services
    • The extent to which the worker makes his or her services available to the relevant market
    • How the business pays the worker, and
    • The extent to which the worker can realize a profit or incur a loss
  2. Relationship. How the employer and worker perceive their relationship is also important for determining worker status. Key topics to think about include:

    • Written contracts describing the relationship the parties intended to create
    • Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay
    • The permanency of the relationship, and
    • The extent to which services performed by the worker are a key aspect of the regular business of the company
    • The extent to which the worker has unreimbursed business expenses

Ultimately, it comes down to how much control you have over the work and the way in which you work (the working relationship). With these IRS-suggested pointers, it becomes much clearer how to classify a worker as either a 1099 vs. W2 employee. 

Still stumped? Fortunately, The IRS has a handy resource, Form SS-8, which you can fill out and send to the IRS to find out exactly how the IRS would classify that worker. 

1099 or W2 employee: What forms do you need?

Now that you’re clear on the difference between employees working on W2 vs. 1099 independent contractors, let’s take a moment to dive into their respective tax forms: the W-2 and W-9 (the latter for 1099s).

Form W-9 (for 1099)

The W-9 form is provided to independent contractors who have completed work for you in the previous tax year:

EXCELCAPITAL - w2 employee vs 1099

Keep in mind, in the case of 1099 workers only, you or your accountant is required to mail a copy of that worker’s 1099 form at the end of the year which shows the worker’s income for the year. 

For more information on the W-9 form, see irs.gov/forms-pubs/about-form-w-9.

Form W-2

Form W-2, as the name suggests, is for W2 employees who work either part or full-time at your business:

EXCELCAPITAL - w2 employee vs 1099

The form is a bit simpler than the W-9 and one which most are much more familiar with given that any typical job provides you with this at the end of the year, as opposed to the W-9. 

How do you know if you need to provide a W-2 to an employee?

According to the IRS, “Every employer engaged in a trade or business who pays remuneration, including non-cash payments of $600 or more for the year (all amounts if any income, social security, or Medicare tax was withheld) for services performed by an employee must file a Form W-2 for each employee (even if the employee is related to the employer) from whom:

  • Income, social security, or Medicare tax was withheld.
  • Income tax would have been withheld if the employee had claimed no more than one withholding allowance or had not claimed exemption from withholding on Form W-4, Employee’s Withholding Allowance Certificate.”

For more information on the W-2 form, see irs.gov/forms-pubs/about-form-w-2.

Is W2 or 1099 a better fit for your business?

Choosing between hiring someone as a traditional W2 employee vs. 1099 independent contractor may or may not be an easy decision. But it’s always an important one and a decision that’s within your control to make. 

How you choose to hire the team that works with you to build your business will affect many important aspects of your business, so take the time to make sure you’re making the choice that best fits you in every position.

You might find that you need a small office staff to answer customer communications or develop your product that are employed on W2 while you can hire several independent contractors outside the office for everything from marketing to accounting. 

Ultimately, the choice is yours. Weight the facts of each and remember that you can choose which positions are traditional W2 employees and which are better suited as 1099 workers. 

What is APR (annual Percentage Rate) and How to Properly Calculate it?

what is apr

Whether you’re asking for a bank loan or applying for a credit card, the most important thing to consider is the APR. You will recognize it as the number expressed as a percentage that will basically indicate how much extra you will have to pay back to the lender. The problem is that many people tend to confuse APR with interest rate, thinking they are exactly the same, and this can cause problems down the road. To protect yourself from unexpected surprises, learn exactly what APR is, what types there are and how it is calculated.


What exactly is APR?


APR stands for annual percentage rate, and by definition it refers to the cost of borrowing money for example through a small business loan,  personal loan or credit card. Besides borrowing, the amount earned from an investment in a year is also referred to as APR, such as the returns from an ETF, stock, etc. In the case of a loan, the APR will always be higher than the interest rate because it includes all the costs incurred by the loan from the lender. Meanwhile, the interest rate is only the cost of borrowing the principal loan amount without accounting for the other costs.


All these are additional costs not covered by the interest rate of the loan but still worth considering. Therefore, compared to only the interest rate, APR is a much more reliable measure of how much a loan will actually cost you so that you can effectively compare different lenders. For instance, two lenders may have the same interest rate but they will differ in the other charges.


Some of the costs commonly included in a loan include:


  • loan application fee
  • loan processing fee
  • underwriting fee
  • document preparation fee


These are common loan fees across the many types of financing made available, but there are others sometimes added by some lenders. Those you may come across in your application may be:





Even the law acknowledges the importance of APR in lending, which is why it was mandated by the Truth in Lending Act (TILA). This legislation was passed in 1968 in order to ensure that borrowers were treated fairly when receiving credit and loans from lenders. It was also meant to create a standardized manner in which the cost of borrowing would be represented so that borrowers could be more informed about what they were getting into.


However, TILA does not dictate what charges lenders can charge because they are still free to set their own rates; the law only requires that lenders be open about their charges. To enforce TILA, the Federal Deposit Insurance Corporation (FDIC) is responsible for ensuring lenders are adhering to the law. The FDIC ensures that all loans are following the law in terms of periodic rates, finance charges, tolerance and good faith reliance. Fortunately, you don’t have to bother yourself with the details as you can trust FDIC to keep an eye on the financial institutions.


For two decades since the inception of the law in 1968, it was very effective in keeping lenders honest. Then in the 1980s some lenders, especially auto manufacturers, took advantage of a loophole in TILA. These lenders take advantage of the fact that ‘amount financed’ and ‘finance charges’ were not totally differentiated. For this reason, they were able to completely get rid of the finance charges by transferring it all to the ‘amount financed’ category.


Thus, lenders were able to claim they provide zero APR financing and now borrowers were able to receive interest free loans. For instance, some auto lenders who provide these zero APR financing and not charge any interest whatsoever will also require a charge a $1,000 rebate. Because the lenders can set their own charges by taking advantage of the loophole, the amount charged as rebate can be higher or lower than APR.

Tila Regulation Changes

Since TILA was passed in 1968, there have been very many amendments to the legislation. Some of the most important changes include the CARD Act of 2009. This amendment targeted credit card issuers by requiring them to disclose important information to anyone that applied for a credit card and to provide a notice before raising interest rates. By 2015, the Consumer Financial Protection Bureau (CFPB) reported that this amendment had saved consumers $16 billion – $7 billion in late fees and $9 billion in over-the-limit fees.


The bad news, though, is that zero percent APR financing is still being offered by some lenders, and this can sometimes take advantage of the borrowers who are unable to receive funding from conventional sources.


What are the types of Annual Percentage Rates?


When borrowing money or using a credit card, most people focus on one form of APR. This is not a problem when asking for a bank loan, but credit cards have varying types of APR that you should be aware of. The most obvious is the purchase APR, which is charged whenever you use your credit card to purchase goods and services. If you happen to violate any of the terms set out in the agreement with the credit card provider such as being late on the payments, a different APR will be applied – penalty APR. Since this is charged after a violation, the APR is usually higher than the purchase APR. Then there is a different APR charged when you use a credit card to borrow money either by cash, check or transfer to another credit card. The APR here is also much higher than the purchase APR and there are often no grace periods on repayment.


That being said, another common form of APR you are most likely to encounter is the promotional APR. Some lenders will also refer to it as an introductory APR, but they both refer to a lower APR offered by a credit card issuer to entice you to take the credit card. The terms of the promotional APR will vary, but they can be as attractive as zero percent APR or, more commonly, a reduced APR.


When considering this form of APR, it is important to remember two factors – length and limits. In most cases, the promotional APR only lasts for a limited time between six months and a year. Once this period is over, the APR will automatically adjust upwards to the standard APR from the lender. Banks and issuers will also impose limits to the types of transactions that would enjoy this lower APR. For instance, a lender may only give promotional APR for purchases but not cash advances or transfers. All these ought to be specified in the fine print, and it is important to be aware of what you are getting into.


Although there are several types of APR as described above, they all fall into two categories – variable and fixed.


How do variable and fixed APRs compare?


From the names, you should already be able to deduce how these two types of APR differ. The fixed APR, also called non-variable APR, is that where the APR does not change throughout the length of the lending relationship. For a bank loan, this means that the rate stays the same until the entire loan is paid back. For a credit card, this means you can enjoy the same rate indefinitely. The benefit of a fixed APR is that there are no surprises and one is thus able to plan their expenses all the way. Despite claiming to provide a fixed APR, some credit card will add some exceptions that would allow them to change the APR based on factors such as market conditions or depending on your usage. To confirm that you are dealing with a truly non-variable APR, take some time to read through the fine print  in detail.


On the other hand, a variable APR is open to change depending on any factor the lender deems relevant. Of course, the good news is that they aren’t allowed to do this without adequate reason so there is no need to be wary. These lenders therefore use the prime rate as a reference to changing the APR. The prime rate is an interest rate determined by the federal funds rate and the bank’s overnight rate. To find the variable APR, this prime rate is added to the margin the bank issues to find a final figure. Banks use this prime rate to calculate various loans including bank loans and even credit cards.


TILA also dictates how lenders can change their APR so as not to inconvenience their clients. First, credit card issuers must notify their clients that they are changing the APR 45 days prior to doing so. Second, 21 days must be given as a grace period from the time a monthly statement is given to the due date. Finally, a company must assess if the borrower has the ability to pay back the loan before they can offer them financing.

Why Is Fixed Rate APR better compared to Variable Rate APR?

Inasmuch as there are risks to using variable APR, it does have some benefits. The most important is that an individual can get to enjoy lower rates in certain market conditions. Recently, the Federal Reserve cut interest rates by 25 basis points, which means lower prime rates and subsequently lower APR. That being said, lenders also take into account delinquency rates to estimate the risk in providing funding. The Federal Reserve Bank of St. Louis recently reported 2.59% in delinquency rates last seen in 2013, and this means higher risk for commercial banks and higher APR.


These and more measures determine the variable APR at any point in time. Most banks and credit card issuers prefer to use the variable rate because it protects them from changing market conditions. That also means lenders have to be prepared for unexpected conditions at any time. It is also important to remember that you can always get a lower APR if you have a higher credit score.


Some lenders will also have a tiered APR where the APR varies depending on the category of debt. As an example, a credit card issuer may charge a lower APR of 4% for debts below $1,000 and raise this to 7% once the debt exceeds $1,000. Again, these APRs could either be variable or fixed but the terms follow a different structure.


How to Calculate APR


There are several ways to calculate APR before you take any loan and know how much you will have to pay at the end of it. To get the exact figures, you will first need to find the interest rate charged, how much you are borrowing, the term of the loan and any other fees. Next you will have to determine what kind of loan you are taking because some like payday loans have a one-time repayment and others like a mortgage or bank loan are compounded every month.


To calculate the APR for an installment loan, you will need to find out the loan amount, loan term and the monthly payment. Let’s take a case of a $10,000 loan to be repaid in 5 years through $250 monthly payments.


  1. Calculate the total amount to be paid back – $250 * (5 * 12) = $15,000
  2. Calculate the interest paid – $15,000 – $10,000 = $5,000
  3. Divide the interest by the number of years – $5,000 / 5 = $1,000
  4. Divide the annual interest by total amount paid – $1,000 / $15,000 = 0.066
  5. Multiply by 100% to find the percentage rate – 0.066 * 100 = 6.6%


For calculating the APR on a credit card, the formula is – (1+[i/q])q-1


Here, ‘i’ is the annual interest rate and ‘q’ is the number of times you pay in a year. If the interest charged by the credit card issuer is 18% and payments are made monthly, the APR would be:


(1+[0.18/12])12-1 = 0.195 = 19.5%


In both illustrations above, the additional costs involved in the loan have not been included, but there are often costs associated that have to be considered. Doing this makes the calculation a lot more tricky, but with the Google spreadsheets you can quickly discover the APR or any loan. The formula begins with finding the monthly payments using the PMT function. PMT represents annuity payments and it can be used in any spreadsheet application:


=PMT (interest rate/months, total number of months you pay on the loan, loan value plus fees)


Assume an individual borrows a $10,000 loan at an interest rate of 12% to be paid back in two years plus a $500 closing fee to the bank. Here, the monthly payments would be:


=PMT (.12/12, 24, 10500)


Monthly payments would be $494. 27. With this, you can now get the APR using the function:


=RATE (total number of months you pay on the loan, your monthly payment expressed as a negative, the current value of your loan)


=RATE (24, -494.27, 10000)


The monthly rate is now found to be 0.0141 and this is multiplied by 12 to get the annual rate of  0.1692. Now multiply this number by 100 to get the percentage figure of 16.92%, which is the APR.


From these calculations, you can now see that the APR is higher than the interest rate that was issued as 12% by the credit card provider at the time of application for the loan.


Apart from using spreadsheets, an even easier way of figuring out the APR is through one of various online calculators. These automatically give you the APR from only the principle amount, interest rate, charges and loan term.


How effective is APR?


Back in 1968 when legislators declared that APR would be the standard representation of charges, they did so to make things more convenient for borrowers. Nonetheless, they did not consider some of the limitations of using APR to calculate the actual costs incurred when borrowing money. For starters, there is no clear definition of which fees should be included in the APR and which ones left out. Due to this, lenders can pick those fees they would prefer to include in their APR and thus they can alter the APR to suit their needs.


Additionally, some costs incurred may fail to be considered in calculating APR such as fees for late payments. The lenders think of these as separate from the rest, but some borrowers may disagree. For these reasons, anyone borrowing from these lenders would have to calculate the APR on their own to determine the actual APR they are paying. Financial experts have come to believe that APR would be best used for long-term loans of, say, 30 years instead of short-term loans of 3 to 5 years.


That being said, APR is not completely worthless because it still does give a borrower an idea of how much they will be paying in total. Add to that, the APR is effective when comparing loan offers from different lenders just as the legislators intended more than 5 decades ago.