Interest rate or fixed fee
Business financing is priced one of two ways.
| Interest rate | Fixed fee (factor rate) | |
|---|---|---|
| Cost is charged on | What you still owe | The full amount, set on day one |
| Pay faster and | The cost falls | The cost stays the same |
| Found on | Term loans, SBA loans, a Business HELOC, most lines of credit, credit cards | Revenue-based financing, some short-term loans, lines of credit that charge a fee per draw |
This guide covers the left column. For the right column, see factor rate vs APR and early payoff discounts.
With an interest rate, two things set your total cost: the rate, and how fast the balance comes down. The second one is decided by the payment formula.
Three ways to repay the same $25,000
One example, used throughout: $25,000 owed at 21% a year, which is 1.75% a month.
| Payment type | Paid off in | Total interest | First payment |
|---|---|---|---|
| Level, 36 months | 3 years | $8,908 | $942 |
| Level, 60 months | 5 years | $15,580 | $676 |
| Interest only | Never | No limit | $438 |
| Geometric, $40 floor | 28.5 years | $42,082 | $688 |
A level payment stays the same every month. An interest-only payment covers the interest and nothing else. A geometric payment shrinks every month.
Same balance. Same rate. The only thing that changed is the payment formula.
Level payments: how a mortgage amortizes
A level payment is what a mortgage uses, and what a term loan uses. The lender picks the one payment that brings the balance to zero on a chosen date, and you pay that amount every month until it does.
Each payment is part interest and part principal. The split moves every month. Take a $300,000 mortgage at 6.5% for 30 years. The payment is $1,896 every month for 360 months.
| Interest | Principal | |
|---|---|---|
| First payment | $1,625 | $271 |
| Last payment | $10 | $1,886 |
Early on, the payment is mostly interest, because the balance is large. As the balance falls, less of the payment goes to interest and more goes to principal. The payment never changes. The end date is fixed. Total interest over the 30 years: $382,633.
The thing that makes it end is the fixed payment. Because the payment does not shrink as the balance shrinks, the principal share grows every month and the balance reaches zero on schedule.
Geometric payments: how a credit card does not
A credit card minimum is not a fixed payment. It is a fixed percentage of whatever you still owe, recalculated every month. Most credit cards work this way, and so do some lines of credit.
Each payment is still part interest and part principal. The difference is that the payment itself gets smaller as the balance does, so there is no fixed payment forcing the balance to zero.
A common card formula is 1% of the balance, plus that month’s interest. On our example:
- Month 1: 1% of $25,000 is $250. Interest is $437.50. Payment: $687.50.
- The balance drops by the $250 to $24,750.
- Month 2: 1% of $24,750 is $247.50. Interest is $433.13. Payment: $680.63.
Each month the balance is 99% of the month before. So is the payment. A number that is multiplied by the same ratio again and again is a geometric sequence. That is where the name comes from.
Does the balance always shrink by the same ratio? Only while two things hold: the payment is a fixed percentage of the current balance, and the rate does not change. Change the rate, add a dollar floor, or charge new purchases, and the ratio moves. The shape stays the same. Each month’s payment is sized from a smaller balance than the month before.
Whether payments are daily, weekly, or monthly does not change any of this. What matters is whether the payment is a fixed amount that ends on a date, or a percentage of what is left.
Here is the problem. 99% of something is never nothing.
| After | You still owe | That month’s payment |
|---|---|---|
| 1 year | $22,160 | $609 |
| 5 years | $13,679 | $376 |
| 10 years | $7,485 | $206 |
| 20 years | $2,241 | $62 |
| 30 years | $671 | $18 |
| 40 years | $201 | $6 |
The payment gets easier every month. That is the appeal. It is also the trap. The debt gets smaller forever and never ends.
Why card issuers set a floor
Two reasons.
The math. A pure percentage payment never finishes. So the card agreement adds a dollar minimum. Large issuers describe the payment as the greater of a flat amount, often $25 to $40, or 1% of the balance plus interest and fees. Once the percentage amount drops below the flat amount, the payment stops shrinking. A payment that does not shrink can reach zero.
The regulators. In January 2003, four federal bank regulators told card issuers that minimum payments should pay off the balance over a reasonable period. Their particular concern was negative amortization, where the minimum does not even cover the interest and fees, so the balance grows while you pay.
Minimums had been drifting down for decades. The average was about 5% of the balance in the 1970s and about 2% by 2000. A Congressional Research Service report worked an example: $10,000 at 16% with a 2% minimum takes more than 40 years and about $19,329 in interest. At a 4% minimum, about 14 years and $4,931.
What the floor does
In our example, with a $40 floor:
- The percentage payment stays above $40 until the balance falls under about $1,455.
- That takes until year 24.
- From there the payment is a flat $40, and the balance reaches zero in year 29.
- Total: 28.5 years and $42,082 in interest on a $25,000 balance.
The floor guarantees the debt ends. It does not make it end soon.
The fix costs nothing
Take the first minimum payment, $687.50, and keep paying it. Do not let it shrink.
| Paid off in | Total interest | |
|---|---|---|
| Minimum payment, shrinking each month | 28.5 years | $42,082 |
| First payment, held level | 4.9 years | $15,089 |
You never pay more in a month than you did in month one. You save about $27,000 and 23 years.
A line of credit rewards this the most. On an interest-rate line, every dollar you repay early stops costing you that day.
The warning your statement may not show
A consumer credit card statement must carry a minimum payment warning. It shows how long payoff will take and what it will cost if you pay only the minimum.
That rule covers consumer accounts. The Credit CARD Act’s rules did not apply to cards labeled for business or commercial use. Some issuers extend the protections to business cards. They do not have to.
If your business card statement has no payoff estimate, run the numbers yourself.
Where you will meet each one
- Term loans and SBA loans: scheduled payments that end on a fixed date. A variable rate can change the payment.
- Lines of credit: the rate is fixed on every line we offer. The payment moves with your balance on some lines and is fixed per draw on others. Kapitus says you repay only the amount you use, with daily, weekly, or monthly payments, and that an amount repaid early is not charged interest for that portion.
- Business HELOC: an interest rate with a level payment on each draw over the term you pick, 5 to 30 years. On Figure’s product the full line is funded at closing, so interest runs on the whole amount from day one.
- Business credit cards: geometric, with a floor.
- Revenue-based financing: not an interest rate at all. The cost is a fixed fee. See how your offer may be structured.
Five questions to ask
- Is the cost an interest rate or a fixed fee?
- Is my payment a fixed amount or a percentage of the balance?
- If it is a percentage, what is the dollar floor?
- If I pay only the required amount, when is the balance zero?
- What do I save if I pay it off early?
How we calculated this
Interest is 21% a year, charged monthly at 1.75% on the balance. Level payments use the standard loan payment formula. The geometric example charges 1% of the balance plus that month’s interest, with a $40 minimum, and runs month by month until the balance is zero. Dollar figures are rounded to the nearest dollar.
We tested the method against the Congressional Research Service example. It returns the same $19,329 and $4,931.
Real card terms vary. Rates change, fees are added, and new purchases reset the math. Treat these as illustrations.
Sources
- Congressional Research Service: Credit Card Minimum Payments, RS22352, updated April 4, 2008, for the 2003 interagency guidance, historical minimums, and the worked example
- Consumer Financial Protection Bureau: Regulation Z, section 1026.7, periodic statement repayment disclosures
- The Pew Charitable Trusts: Business Credit Cards Place Millions of U.S. Households at Risk, May 18, 2011
- Chase: How to calculate your minimum credit card payment and NerdWallet: How Credit Card Issuers Calculate Minimum Payments, updated September 17, 2025, for common minimum payment formulas
- Kapitus: Line of Credit, checked October 13, 2026