The true cost of borrowing, explained without numbers games

Lending is full of numbers designed to catch your eye. A low weekly repayment. A headline rate. A “from” figure with an asterisk. The trouble is that none of these, on their own, tells you what a loan actually costs your business.

We don’t publish rates, and this guide won’t either. Every loan is priced on the borrower’s individual situation, so a number on a website is at best a guess and at worst a lure. Instead, here’s how a friend who knows lending would help you work out the true cost of any offer in front of you.

What does “true cost” actually include?

Think of it in three layers.

Layer 1: What you’ll pay

• Interest over the life of the loan.
• Establishment or application fees.
• Legal and valuation costs, common with property-secured loans.
• Ongoing fees — monthly account or administration fees.
• Exit costs — early repayment, break or discharge fees.
• Broker or arranger fees, if any.

Add them together and you have the total repayable. That’s the single most useful figure for comparing loans for the same need.

Layer 2: How it behaves

Two loans with the same total can feel very different to live with:

• Repayment frequency — daily, weekly or monthly deductions change your cash flow.
• Flexibility — can you repay early without penalty? Draw again if you need to?
• Default terms — how harsh are the consequences of a late payment?
• Security and guarantees — what’s at risk if things go wrong?

Layer 3: What it does for you

This is the layer most people forget. A loan’s cost only makes sense next to its benefit:

• the profit from the stock you could buy;
• the penalties and interest you stop paying IRD;
• the contract you can say yes to;
• the time and stress saved by replacing four repayments with one.

A loan isn’t cheap or expensive in the abstract. It’s cheap or expensive compared with what it lets you do — and with what happens if you don’t borrow.

Why can the headline number mislead?

Because it usually describes only one part of the cost. A few common ways numbers get dressed up:

• Short-term loans quoted weekly. A small weekly figure over a short period can hide a large total.
• Fees outside the headline. An attractive rate with a large establishment fee may cost more than a plainer offer.
• Interest-only periods. Low payments now, bigger ones later.
• Fees deducted from the advance. You borrow one amount but receive less, while still paying interest on the full amount.

None of these are necessarily wrong. They just mean you need the full picture before you compare.

How do I compare two offers fairly?

Put them side by side, for the same amount and similar term:

Then ask yourself which one fits your business, not just which one is smallest. A slightly higher total might be worth it if it comes with monthly repayments that match your cash flow, or funds in time to capture a deal that pays for the loan several times over.

What’s the cost of not borrowing?

It’s real, and it belongs in the sum:

• Tax arrears grow. Inland Revenue charges a 1% late payment penalty the day after the due date and a further 4% on day seven on anything still unpaid, plus interest on overdue amounts. Leaving a tax debt to sit has its own price.
• Missed opportunities. The bulk-buy discount, the contract, the busy season you couldn’t stock for.
• Stress and time. Juggling creditors takes hours you could spend running the business.

Equally, borrowing has a cost you can avoid entirely when the need isn’t real. Our guide on when not to borrow is the other side of this coin.

How does the term change the cost?

A longer term usually means smaller repayments but more total interest. A shorter term means bigger repayments but less total cost — if you can comfortably make them. The right term matches the life of what you’re funding:

• Short to medium term for working capital, stock, tax and bridging needs.
• Longer term for long-lived assets and property, often with a bank once your file supports it.

Funding a long-term asset with very short money creates refinancing pressure. Funding a short-term gap with long money means paying for money you no longer need.

Questions to ask any lender

1. “What’s the total I’ll repay, including every fee?”
2. “How much will actually land in my account?”
3. “What does it cost if I repay early?”
4. “What happens, exactly, if a payment is late?”
5. “Is there anything I’ll pay that isn’t in that total?”

A good lender answers all five without flinching.

Where LendFriend fits

We look at your situation and match you with a lender from our panel that suits it, then walk you through the offer — total cost, repayments, flexibility and risks — in plain English. Every loan is priced on your individual circumstances, and we’ll find the sharpest option available for yours. No numbers games.