Cash is King
“Cash is king” might have been the phrase you always heard your grandfather say, but to those who run small businesses across the United States, this phrase has possibly never been truer and with cash enter a term that businesses with funding often encounter: the interest rate. When applying through banks, 70% of small business owners (SBO’s) are either declined outright or fail to acquire the necessary amount of capital needed to operate their business. At Equeduct, our goal is to empower SBO’s by providing them the capital they need to sustain and grow their businesses. These needs can range from reoccurring costs, such as payroll and rent, to marketing and technology. Regardless of the specific use of funds, cash remains king for SBO’s, as those who have it prosper and those that do not fail.
Knowledge is Power
We want to empower business owners with resources that will educate and update them thus assist them in making the best financial decisions for their business. Our glossary index highlights and explains financial terminology essential to run businesses. This allows SBO’s to build a foundation and improve upon their knowledge of the small business financial landscape on-demand.
In our first financial glossary article, we will be highlighting a frequently used but often misunderstood concept: simple versus compounding interest rates.
Interest Rate Definition
According to Investopedia, the interest rate is the amount a lender charges for the use of assets expressed as a percentage of the principal. For businesses, the asset could be capital, cash, or equipment. Assets can also be large assets like a vehicle, a building, or anything with a collateral value. The interest rate can be calculated annually, which is known as the Annual Percentage Rate (APR). It can also be calculated on a monthly basis.
Understanding Interest Rate
Simple Interest– Simple interest is a set rate on principle initially lent to the borrower that the borrower has to pay for the ability to use the money. Simple interest is termed as “simple” because it is direct and ignores the effects of compounding. The interest charge is always based on the original principal, so interest on interest is not included.
Compound Interest- Compound interest is interest calculated on the initial principal and on the accumulated interest of previous periods of a deposit or loan. Compound interest can be thought of as “interest on interest.” It will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount. The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest APR-The annual rate that is charged for borrowing, expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.
In our next blog article, we will be highlighting the products and benefits Equeduct offers to small businesses looking for funding with a low-interest rate.