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How Much Does a Business Loan Cost?
Some business loan costs are clear, such as interest rates, and others are a little more niche. Here at Clifton Private Finance, we like transparency, which means we want our customers to be fully informed of any costs before proceeding with a loan that we advise on.
This short guide will help you understand all the costs of a loan and help you make a fully informed decision.
Contents
#1 - Interest
#2 - Fees
#3 - Cash Flow
#4 - Opportunity
#5 - Time
#6 - Flexibility
#7 - Future Credit
#8 - Credit Rating Impact
Business Loan Cost Calculator
Business Loan Cost #1 - Interest
Almost all loans incur interest. Interest is the way a lender makes profit and has been a staple of loans since their invention, back when people borrowed loaves of bread on the promise of giving back a lamb for dinner once they’d grown.
Today’s interest rates are calculated as a percentage of the money borrowed and are typically given as an annual value.
Because interest is a percentage value that’s added over time, the longer the terms of your loan, the greater the interest paid overall, so considering the interest rate without also thinking about the length of the loan can be misleading.
A loan at 30% for one year will add less interest than one at 6% for ten years. This is why very short-term business loans will typically have higher interest rates than very long-term business loans.
Interest is calculated based on a number of factors that include:
- The current base rate - The is the interest rate set by the Bank of England and represents the interest rate applied when banks lend money to each other.
- The applicant risk factor - Risk factor is calculated using a number of metrics and available data, but a more risky applicant will face higher interest rates than a safer one.
- The lender profit margin - Individual lenders will increase their interest rates based on their business model and the profit they are looking to make.
- The market - Trends in the market and competition between lenders will bring interest rates down as each lender tries to entice customers.
- The length of the loan - As explained above, the length of the loan terms has a large impact on the rates offered.
For all the reasons described above, it is impossible to say what the interest rate a business loan will have without recieving a direct quote.
Some long-term asset-based loans (for example, a commercial mortgage) will command low interest rates, even below 5% in some cases; while short-term lines of credit can have interest rates in excess of 30%.
Here's a very brief overview of different types of business loans and their costs:
| Loan Type | Interest Rate | Notes |
|---|---|---|
| Unsecured Loans (up to 24 months) | 1% - 5% per month | Provided by cash-flow lenders, interest charged monthly, early settlement typically allowed. |
| Unsecured Loans (3-6 years) | 10% - 30% annually | Rate depends on risk. |
| Secured Loans | 10% - 20% annually | Usually secured by personal property. |
| Asset Finance | 6.87% - 15.04% annually | |
| Commercial Mortgage | From 2% over base rate | |
| Invoice Finance | From 1% over base rate + minimum monthly service charge | + minimum monthly service charge |
| Tax Loans (VAT & Corporation Tax) | From 7.05% annually | |
| 2nd Charge Mortgage for Business Purposes | From 8% annually | |
| Merchant Cash Advances | From 15% annually |
All businesses are looking for interest rates as low as possible, which is why working with a professional business loan broker, such as Clifton Private Finance, is beneficial. A financial broker works every day to maintain strong relationships with lenders and scour the market for the best rates for their clients.
With access to the whole marketplace of lenders, including many who do not deal directly with private customers, a broker will be able to find the best deals possible.
Business Loan Cost #2 - Fees
Loan fees are a less-discussed cost of business loan. Not every loan has fees, and some loans have fees that are generally never triggered, but fees do exist and when calculating the true cost of a business loan, they should be taken into account.
Examples of some common loan fees include:
- Origination fees - Normally calculated as a percentage of the loan total, an origination fee is a non-refundable amount charged by some lenders to cover the administrative cost of evaluating the borrower’s creditworthiness and preparing documentation.
- Application fees - Similar to origination fees, an application fee may be applied to mitigate the cost of reviewing and processing your loan application.
- Early repayment fees - An early repayment fee, sometimes called a prepayment fee, is often due if you pay off a loan early. This is to reimburse the lender for some of the interest they lose in you ending the loan before the agreed term.
- Late payment fees - Missing a payment or paying late will incur a late payment fee in many cases.
Understanding the fees can be complicated. It’s always worth discussing your loan with an advisor and reading the ‘small print’ before agreeing to the contract.
Business Loan Cost #3 - Cash Flow
When you take out a loan, you commit to making the repayments every month for the remainder of the term. This will have an impact on your business cashflow for the foreseeable future.
Managing budget and cashflow is an important part of good financial business management and should not be taken lightly. While you may feel you can afford the additional outgoing in the short-term, consider its impact during months where you may be lighter on cash.
Many seasonal businesses look to financing to help bridge those difficult months, but this is only viable if the loan is fully repaid before the next difficult season approaches.
While the effect on cashflow is not a direct financial cost, it is still a factor that will limit future business growth and must be given equal consideration to items such as interest and fees.
Business Loan Cost #4 - Opportunity
The responsibility to make regular repayments that ties up your cashflow also limits your business’s ability to take advantage of opportunities. For many businesses, the ability to react to chances that come up is key to their acceleration and growth, but to do so can require having free capital available at a moment’s notice.
Commitment to a loan, especially a large one with a significant monthly repayment, can hinder your capacity to get a boost in this way.
Like other cashflow-related disadvantages, lost opportunities do not represent a direct financial cost, but are no less relevant to your informed decision-making when considering a loan.
Business Loan Cost #5 - Time
Selecting and applying for a loan can take a lot of time, especially if the loan is especially large, long-term, or complex.
Financing and funding is a specialist subject that takes time to learn and years to master, so diving into it without any preparation can be costly and distracting.
For this reason, you should consider utilising the services of a professional funding partner. An experience business finance broker, like Clifton Private Finance, has all the skills you need to obtain a suitable finance solution without it costing you in your time that’s doubtless better spent advancing your business.
Time has a direct cost that is often overlooked when business owners look into funding, but it should be factored in like any other financial impact.
Business Loan Cost #6 - Flexibility
A loan is an ongoing obligation that will lock your business into years of responsibility. This can stifle your ability to make changes and use the money elsewhere in the future. Similar to other cashflow related disadvantages, the hinderance to your ongoing business flexibility should be taken into account.
Business Loan Cost #7 - Future Credit
Being tied to a significant business loan can prevent you from getting credit in the future - this may even be a more favourable loan on superior terms to the one you currently have.
Any future funding provider is going to look at your business credit history and debt service coverage ratio to determine if you are viable for additional financial support, so it’s important to not overstretch yourself.
When you are considering a loan and its overall cost to your business, make sure you choose one that can be well managed and doesn’t have too great an impact on your monthly finances such that it’ll not give you the financial flexibility you may need to show in the future for new credit options.
Business Loan Cost #8 - Credit Rating Impact
The affect a business loan will have on your credit rating will either be positive or negative, depending on how well you manage the financing. If you pay your loan back on time, every time, then this is not a cost at all, but a benefit that will show future lenders that you are a stable borrower who presents a low risk proposition.
However, poorly managed, your business loan could cost you considerably with a long-term negative mark on your credit report. In the worst cases, defaulted payments can lead to CCJs and even liquidation.
Make sure that you consider this cost when making your loan application and only move forward if you are confident that you can comfortably make the repayments throughout the loan term.
See the latest market news below.
2024 Business Finance Market Update
In the past year, business finance saw significant growth, perhaps surprisingly driven by challenger lenders and alternative finance providers. Many of these lenders reached their largest milestones in 2024, primarily through supporting SMEs that may have struggled to access traditional funding elsewhere.
Businesses are continuing to face significant economic challenges carried over from 2023. High inflation, supply chain disruptions, and geopolitical tensions persist, which have complicated financial planning and made it difficult for businesses to acquire funding.
But the Bank of England has cut its base interest rate for the first time in 4 years, signalling a cautious shift toward economic stabilisation after years of inflationary pressure. Further cuts are anticipated, and businesses can expect a flurry of spending in the coming months.
As well as this, a number of banks and large firms seem to be racing to the finish line to implement generative AI and new technology that could streamline business and boost profits. Enhancing tech in banking looks like a win-win for lenders and borrowers, offering more personalised financial solutions and a quicker, more secure process.
In the tech industry, investments in AI are reshaping business. Tech giants like Alphabet, Amazon, and Microsoft have seen their market values surge, driven by the rush to implement AI.
Business Loan Cost Calculator
Use our business loan calculator to get an understanding of what your interest repayments could cost you:
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Obtaining Funding with Clifton Private Finance
At Clifton Private Finance we have the years of experience and funding market knowledge you need to obtain a loan that best suits your business requirement.
Our advisors will talk with you regarding the varied costs of a business loan and make sure your loan is a positive asset to your company and not something that will lead you down a difficult future path. Speak with us today to see how we can help.
