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May 13, 2022
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5
min read
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Written by: 
Moritz Witte

Do your research carefully: different pricing models for working capital finance

Do your research carefully: different pricing models in the working capital finance market

1% per month might not always mean the same when taking on a business loan.

Researching the perfect finance provider for your online business can be challenging and overwhelming, given the broad range of options. The reasons for taking up additional funds are oftentimes very similar for e-commerce sellers: avoiding out-of-stock, accelerating growth with new products, or boosting ad spend. Potential solutions are offered by many companies, including your local banking institute, fine traders, factorers, revenue-based financers, or asset-based financers like Myos. While we covered the different types of financing in a recent blog article, we want to shed light on different ways to communicate the price of a loan and why it is so important to understand their implications.

The difference between monthly interest and fees

When browsing through financing websites, prices are usually shown as a percentage, either per month or one-time. Attention! When comparing offers, pay close attention to the terms “interest” and “fee”, and be aware of the their different implications:

While interest is calculated on the respective outstanding credit volume at a given time, fees are based on the total initial credit amount.

So what does that mean for you as an online seller looking to increase liquidity? The following table illustrates how a hypothetical price of 1% per month can lead to two very different outcomes within these models:

Differences between interest and fee model by the example of a 6-month loan

Note how in the interest model, your effective monthly payment actually decreases with the duration of the project. This is because as you’re repaying the loan, the base for the interest calculation decreases, thus resulting in smaller interest payments (for simplicity we assume a linear repayment). This interest model is traditionally used for lines of credit, e.g., from your house bank. More recently, asset-based financers like Myos further developed this model by adding flexible repayments. If, for example, you decide to repay the total loan after only one month, you are only paying the interest for this period of time.

The fee model, on the other hand - mostly offered by fine traders and revenue-based financers - is always calculating the monthly or one-time fee based on the total initial credit amount, which results in a fixed fee stable over time. Therefore, if you discover that a company offers prices starting at 0.7% per month using a fixed fee on the total amount, be aware of the fact that this is actually equivalent to ~1.2% effective monthly interest! The same is true for the one-time fixed fee model offered for most revenue-based loans: If you pay a one-time fee of 6% and repay the loan over 6 months, your actual effective monthly interest is ~1.69% (or 20.29% annually!)

An additional problem with fine traders is that you have to start paying back from the first month — that is, when your ordered goods are likely still in transit and you can’t even monetize them yet. Actually, fine traders usually lend you much less for the whole term, because you have to pay back earlier; and if you extrapolate that over the year, you pay at least 15-20% p.a. And it doesn't stop there: you have to pay back strictly every month. In other words, you have the full loan only for half the time, or only half the loan amount for the full term. To give you a better overview, the following info table illustrates the different pricing approaches with a simple example.

Example of cost breakdown for the most common pricing models in the working capital finance market

Conclusion

Being aware of the differences between interest and fee pricing models helps you navigate through potential offers more effectively and confidently, as it allows you to understand the “true” price you end up paying on your loan. While fine traders and revenue-based financiers often operate with a fee-based pricing model, traditional banks and asset-based financiers like Myos use an interest-based model. If you are looking for a strategic growth partner to accelerate your online business with low monthly interest rates, repayment flexibility, and no personal guarantees, Myos might be the optimal solution for your e-commerce business. Check out the Myos benefits in more depth, calculate your monthly interest directly on our website, or simply get in touch with us — we are always happy to support you on your growth journey.

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