What Is the CAT and Why Should Your Business Consider It Before Applying for Financing?

When you're leading a business, every financial decision affects your profitability and long-term sustainability. Whether you're considering a line of credit, a business loan, or a corporate credit card, it's not enough to focus on the interest rate alone. You also need to consider the Total Annual Cost (CAT)—a key metric that reflects the full cost of borrowing.

In this article, we’ll explain what the CAT is, how it’s calculated, why it’s important, and how to use it to make smarter financial decisions for your business.

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What Is the CAT?

The Total Annual Cost (CAT) is a standardized metric that expresses, as a single annual percentage, the complete cost of a financing product. Unlike the nominal interest rate, the CAT also includes:

• Origination or processing fees
• Annual or monthly charges
• Required insurance
• Penalties or extra service fees
• Any other associated financial costs

This makes it a powerful tool for evaluating the real cost of borrowing and comparing financial products across institutions.

Why Is the CAT Important for Businesses?

In a business context, financing can serve many purposes: managing cash flow, expanding operations, investing in equipment, or paying suppliers. However, two financial products with similar interest rates can have very different overall costs once you account for fees, insurance, and other charges.

By looking at the CAT, business decision-makers can:

• Compare loan and credit offers more effectively
• Understand the true long-term cost of borrowing
• Choose financial tools that minimize unnecessary expenses and preserve cash flow

In short, the CAT gives a comprehensive view of what your company will actually pay—making it an essential factor in any financial planning process.

How Is the CAT Calculated?

Although the calculation may vary by country or institution, the CAT generally includes all mandatory payments tied to a financing product, expressed as an annual percentage. Some common components are:

• Annual interest rate
• Account setup or origination fees
• Monthly or annual maintenance fees
• Insurance premiums
• Administrative charges

Example:
If your business applies for a credit card with a 30% interest rate, a fixed annual fee, and required insurance, the CAT reflects the total annual cost of maintaining and using that product.

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Is It Mandatory to Disclose the CAT?

In many countries, financial institutions are required by law to disclose the CAT or an equivalent metric. This ensures transparency and helps businesses and individuals make better-informed decisions. In any case, it’s always a good idea to request the CAT before signing any financing agreement.

What the CAT Doesn’t Include

While the CAT is comprehensive, it typically does not include taxes (such as VAT or sales tax on services). It also excludes any variable or conditional charges that depend on how you use the product, like late payment penalties or changes in floating interest rates.

Always read the fine print, and ask for clarifications about what is and isn’t included.

Do You Always End Up Paying the Full CAT?

Not necessarily. The CAT is a maximum estimated cost based on standard usage. Your actual cost may be lower, depending on how you manage the product.

For example, if you pay off your corporate credit card in full every month, you may avoid most interest charges and only pay annual fees. On the other hand, if you carry balances or withdraw cash, your costs could rise significantly—approaching the published CAT.

How to Use the CAT to Make Better Financial Decisions

Here are a few tips to help you evaluate financing options wisely:

• Compare CATs across similar products, not just interest rates
• Assess total impact, including fees and additional services
• Check average CAT benchmarks in your country or industry to know if an offer is competitive
• Review all contract terms, as the CAT can change with usage conditions
• Use official loan simulators or calculators to evaluate real-case scenarios

Practical Example

Let’s say your company is choosing between two business credit cards:

CardAnnual Interest RateAnnual FeeCATA29%Yes68.2%B36%No72.4%

While Card B has no annual fee, its higher interest rate results in a higher total cost. If your business tends to carry a balance, Card A could be more cost-effective in the long run.

What If You Ignore the CAT?

Many businesses fall into the trap of choosing financing based solely on promotional rates or initial offers. Failing to consider the CAT can lead to:

• Unexpected high costs
• Challenges in meeting monthly obligations
• Negative impacts on your working capital
• Long-term over-indebtedness

Being aware of the CAT helps you avoid these risks and maintain financial control.

Frequently Asked Questions

Does the CAT only apply to credit cards?
No. The CAT is used for all types of credit products: business loans, revolving credit, leasing agreements, and corporate credit cards.

Does the CAT include taxes?
Usually not. Taxes like VAT are typically excluded from CAT calculations. Always confirm with the lender what’s included.

Where can I check the CAT for a financial product?
Ask the financial institution directly or use online calculators that simulate CAT based on real figures.

Can the CAT change over time?
Yes. If the terms of your agreement are flexible or based on usage patterns, the CAT may vary over time.

Want Expert Support to Evaluate Financial Tools?

At Openbiz, we help entrepreneurs and businesses make confident decisions when it comes to credit and financing. From understanding the CAT to optimizing your tax position, we’re here to guide you every step of the way.

Contact our team today and let’s build a financial plan that helps your company grow securely and sustainably.

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