What is the difference between flat rate and reducing balance?

Two methods of determining interest on business loans are flat-rate and reducing balance. Using flat rate, the interest is calculated on the full principal amount for the duration of the loan, regardless of how much you have already repaid. In other words, your interest outgo remains fixed. Fixed or flat interest rate loans can make your loan seem less expensive than it actually is. On the other hand, when you use the reducing balance method to calculate interest, interest is only calculated on the principalle that is outstanding. 

The following table gives you a quick overview of the difference between flat rate and reducing balance.

When comparing loan offers, always check what method is in use. Flat rates can appear attractive with a lower quoted rate, but the effective interest paid is usually larger than a reducing balance loan. Use online calculators to compare both using real numbers to more easily understand the "real cost" before completing any commitments.