How much does a business loan cost?

What makes up the cost

The total cost of a business loan has two parts: interest and fees. Interest is the price of the money over time; fees may include arrangement or facility charges, and on some products early-settlement or late-payment charges. Add them together across the life of the loan and you have the true cost. The cleanest way to judge any offer is to look at one number: total amount repayable. Subtract what you borrowed, and what's left is what the finance actually cost you — regardless of how the rate is presented.

The three things that drive it

Three variables decide the cost of any business loan:

• The rate — set by the lender based on the risk and the product
• The amount — interest is charged on the balance, so more borrowed means more cost
• The term — the longer the money is outstanding, the more interest accrues

Term is the one borrowers most often underestimate. A short-term facility carries less total interest than a long one, because interest stops accruing once the balance is repaid. For working capital, borrowing only as long as you need keeps the cost down.

An illustrative example

Take a £20,000 facility, purely as an illustration of the mechanics — not a Credicorp quote. Borrowed over a short term of a few months, the interest might total a few hundred to low-thousands of pounds depending on the rate. Stretch that same £20,000 over two or three years and the total interest can be several times higher, because the balance is outstanding for far longer. This is the central trade-off: longer terms mean smaller monthly payments but a higher total cost. Match the term to the need — short-term needs to short-term finance — and you pay less overall.

What this means for your company

To compare offers fairly, ask every lender for the total amount repayable and a full list of fees, then judge them on that single figure rather than the headline rate alone. For working capital, the cheapest route is usually the shortest term you can comfortably repay over, with no penalty for settling early. See how Credicorp structures its short-term facilities on the business loans page, and read are there fees on business loans? for the full fee picture.