Effective Annual Rate (EAR)

Where EAR and APR split apart

Both numbers start in the same place: the rate charged over one payment period. What they do next is different.

APR = periodic rate × number of periods in a year
EAR = (1 + periodic rate) raised to the number of periods, minus 1

APR is plain multiplication, so it quietly assumes cost does not build on itself. EAR compounds, treating each period’s cost as if it joined the balance before the next period ran. At ordinary rates and monthly payments the two barely differ — 12% nominal compounded monthly gives an EAR of 12.68%, a gap of two-thirds of a point. The gap only becomes interesting when the rate is high and the periods are many, which is exactly the shape of short-term business financing.

One advance, calculated both ways

Take the same deal used on our APR page so the comparison is honest:

• Amount funded — $50,000
• Factor rate — 1.35, so $67,500 total payback and $17,500 of cost
• Schedule — 126 business days of ACH at $535.71 per business day

The rate that makes those 126 payments worth $50,000 today is about 0.4996% per business day. Multiply by 252 business days and the APR is roughly 126%. Compound the identical daily rate across the same 252 days and the EAR is roughly 251%. Nothing about the contract changed between those two lines. Only the assumption about whether cost compounds did.

Switch the same $67,500 to 26 weekly payments of $2,596.15 and the numbers move to about 123% APR and 237% EAR. Fewer, larger payments compound less. That is the whole mechanism.

Why frequent remittance widens the gap

Compounding gets its power from the number of periods, not the size of each one. A conventional loan compounds twelve times a year. An advance collected by daily ACH has more than 250 periods. Push a high periodic rate through 250 periods instead of 12 and the exponential curve does the rest.

This is also why repayment speed matters more than the factor rate itself. The $17,500 cost above is locked at signing and never changes. Finish in four months rather than six and the dollar cost is identical, but both APR and EAR jump because you compressed the same cost into fewer days.

What it means for your business

Use APR to shop and EAR to understand. When you have three written offers in front of you, APR is the number that ranks them fairly, because it is the convention every lender already speaks. EAR is what you reach for when someone tells you an advance is “basically a 35% product.” It is the fastest way to see that the shape of a repayment schedule can matter more than the price tag stapled to it.

Whatever number you use, apply it consistently. Comparing one provider’s EAR against another’s APR will always make the second look cheaper, and that is not a coincidence in a sales conversation. Ask every provider for the same three figures: total dollars repaid, payment per period, and expected number of periods. From those you can compute either rate yourself. If you would rather have someone build the comparison with you, that is what our team does before you sign anything — start with a merchant cash advance review and see how the offers actually stack up.

What to watch for

• Nobody is required to quote you an EAR. Advances are not consumer credit, so there is no disclosure obligation for either rate. If you want EAR, you compute it, or you ask someone independent to.
• Mixed comparisons are the classic trap. A bank quoting 11% APR and a funder quoting an EAR are not on the same scale. Convert everything to one convention before you rank anything.
• EAR assumes something an advance never does. Compounding implies unpaid cost rolls into the balance. On a fixed-payback advance it does not. EAR describes the cost intensity of the schedule, not a balance that is actually growing — useful, but not literal.
• Fees sit outside both rates unless you put them in. Add origination and per-debit charges to the cost before you annualize, or you are pricing a different deal than the one you are being offered.

What is the difference between EAR and APR?

APR multiplies the periodic rate by the number of periods in a year. EAR compounds it instead. On a $50,000 advance at a 1.35 factor rate repaid across 126 business days, the APR is about 126% and the EAR about 251% — one contract, two conventions. APR is the standard for comparing offers; EAR shows the compounding intensity of the payment schedule.

Is EAR always higher than APR?

Whenever there is more than one payment period per year, yes, and the gap grows with both the rate and the number of periods. They are equal only when interest is charged once annually. At low rates the difference is small — 12% nominal compounded monthly gives 12.68% EAR — but at short-term financing rates with daily payments it can more than double the figure.

Which rate should I use to compare business loan offers?

Use APR, applied identically to every offer, and treat EAR as a sanity check. The one rule that matters is consistency: never compare one provider’s APR against another’s EAR. Ask each for total dollars repaid, the payment amount, and the number of payments, then run the comparison yourself on one convention.