Guide · Loan math
Amortization vs. Simple Interest
Two business loans quoted at the same headline rate can cost radically different amounts — because they charge interest differently. An amortized loan calculates interest on your shrinking balance each month, so you pay less as principal comes down. A simple interest loan (common with MCAs, revenue-based financing, and short-term business loans) sets total interest up-front as a fixed dollar amount, no matter how fast you pay. Below is a side-by-side of both methods, a worked $50,000 example showing the dollar difference, and when each one actually makes sense for your business.
Side-by-side comparison
| Feature | Amortized loan | Simple interest loan |
|---|---|---|
| How interest accrues | On the remaining balance each period | Fixed total interest set up-front |
| Payment structure | Equal payments; interest-heavy early, principal-heavy late | Equal payments split evenly across principal and interest |
| Prepayment savings | Yes — early payoff reduces future interest | Usually no — total interest is baked in (unless there's a prepay discount) |
| Common use | SBA loans, term loans, mortgages, auto loans | Short-term business loans, MCAs, some equipment loans |
| Cost of $50K over 24 months at ~15% | ~$8,180 total interest (declining balance) | $15,000 total interest (fixed) |
| What you'll see quoted | APR | Factor rate or total cost of capital |
Worked example: $50,000, 24 months
Amortized at 15% APR: monthly payment ≈ $2,424; total repaid ≈ $58,180; total interest ≈ $8,180. Pay it off in month 12 and you save roughly $3,400.
Simple interest at a 1.30 factor: total repaid = $65,000; total interest = $15,000. Weekly payment ≈ $625. Pay it off in month 12 and you almost always still owe the full $65,000 — the fee was fixed at signing.
Same $50K principal. Same 24-month window. Nearly double the cost on the simple-interest side — and no savings from paying early.
When each makes sense
Choose amortized when you qualify (FICO 680+, 2+ years in business, tax returns available) and you can wait the extra week or two to close. You'll pay far less and preserve the option to prepay.
Choose simple interest when you need cash in days, credit is under 680, or the business is under two years old. Just budget the full repayment amount from day one and don't count on prepay savings.
Run the numbers
Model an amortized SBA loan with our SBA loan calculator to see the payment schedule, or read more on how business loan interest rates work.
Frequently asked questions
What's the main difference between amortization and simple interest?
An amortized loan calculates interest on the remaining balance each period, so interest shrinks as you pay down principal. A simple interest business loan sets total interest up-front as a fixed dollar amount — paying early usually doesn't reduce what you owe.
Which is cheaper?
Amortized loans are almost always cheaper if you hold the loan to term, and dramatically cheaper if you prepay. Simple interest products are quoted with factor rates (e.g. 1.30) and can look small but often work out to 40–80%+ APR.
Is a factor rate the same as simple interest?
Effectively yes — factor rates express simple interest as a multiplier. A $50,000 advance at a 1.30 factor means you repay $65,000 total, regardless of how fast you pay.
When should I choose a simple interest loan?
When you need speed and can't qualify for an amortized product. Merchant cash advances, revenue-based financing, and short-term business loans use simple interest and fund in days. Just don't expect to save by paying early.
How do I compare an amortized loan to a factor-rate loan?
Convert both to APR. A $50K amortized loan at 15% APR over 24 months costs about $8,180 in interest; a $50K simple-interest loan at a 1.30 factor over 12 months costs $15,000 — an effective APR closer to 55%.