1. What is the Annual Financing Cost (AFC)?

The Annual Financing Cost (AFC) is a financial metric used to calculate the true annual cost of borrowing, expressed as a percentage. It accounts for both interest and fees relative to the usable funds over the financing period.

2. How Does the Calculator Work?

The calculator uses the AFC formula:

Where:

• \( Interest \) — Total interest paid on the financing
• \( Fees \) — Additional fees associated with the financing
• \( Usable\ Funds \) — Net amount of funds available for use
• \( Maturity\ Days \) — Term of the financing in days

Explanation: The equation calculates the effective annual cost by considering all financing charges relative to the actual funds available, then annualizing the result using a 360-day year.

3. Importance of AFC Calculation

Details: Calculating AFC is crucial for comparing different financing options, understanding the true cost of borrowing, and making informed financial decisions. It provides a standardized way to evaluate short-term financing costs.

4. Using the Calculator

Tips: Enter all monetary values in the same currency. Interest and fees should be the total amounts for the financing period. Usable funds represent the net amount received after any deductions. Maturity days should be the actual term of the financing.

5. Frequently Asked Questions (FAQ)

Q1: Why use 360 days instead of 365?
A: The 360-day year is a banking convention that simplifies interest calculations and is commonly used in commercial financing.

Q2: What types of fees should be included?
A: Include all upfront fees, processing charges, and any other costs directly associated with obtaining the financing.

Q3: How does AFC differ from APR?
A: While similar, AFC is typically used for short-term commercial financing, while APR (Annual Percentage Rate) is more common for consumer loans and may use different calculation methods.

Q4: When is AFC particularly useful?
A: AFC is especially valuable for comparing short-term financing options like invoice factoring, merchant cash advances, and lines of credit.

Q5: Can AFC be used for long-term financing?
A: While the formula works mathematically, other metrics like IRR (Internal Rate of Return) are typically more appropriate for long-term financing analysis.