Finance Insights

How to compare the real cost of business finance products


Business finance covers a lot. With more products entering the market every day, it can be hard to find the one that suits you. And with such variety in how the offers are structured – it can be even harder to tell how much it really costs. It’s no longer enough to look at the headline rate. That never tells the full story when it comes to fees. You need to dig deeper to make sure you’re not blindsided by additional charges or conditions.

Here are a few finance options you’re likely to encounter time and again – and the things worth looking out for.

Asset finance

With asset finance, you’re not buying the assets outright. Instead, you have a hire agreement with the funder – and agree a monthly repayment sum. At the end of an agreed period, you will have paid off the loan and only then will you own the asset. You’ll normally need to pay a deposit on an asset finance agreement. A lower interest rate can mean a bigger deposit is required. Yet, a low deposit but higher interest rate could mean you end up paying over the odds for the asset in the long run. Terms on asset finance usually range somewhere between one and seven years. Some longer-term agreements will include a settlement fee if you want to cancel early. It’s worth asking how this is calculated before you commit. And make sure you can afford the repayments. If you default on payment you will lose the asset – and that could impact your ability to do business.

Property finance

Property finance covers a number of options, but most commonly would be a commercial mortgage. The extra fees here are similar to those for the mortgage on your home. Fixed or variable interest rates are the main factor to watch for. A fixed rate will help you to accurately forecast your business finance, whereas variable will leave you open to fluctuating rates – good and bad. Make sure you understand how your offer works. As well as the headline rate, ask about arrangement fees. These normally come in at 0.75% to 2.5% of the overall value. This could also include a commitment fee on acceptance of the mortgage offer. Some lenders will charge you a valuation fee, so they can conduct their own assessment of the property before making an offer. Be sure to ask if this applies.

There will be legal fees, too. Commercial mortgages are often more complex than residential, so the legal fees tend to be higher. In addition to your own fees, there may be some costs you need to cover for the lender. Find out how this works upfront to get a clear picture of total costs.

Cash flow finance

Cash flow finance usually takes the form of a standard term loan or invoice finance. Each of these present slightly different costs to consider. For a standard term loan, you agree a repayment period with the lender upfront. This helps you forecast accurately, but if you want to pay up early then you’ll probably need to hand over an early repayment fee. Speaking of forecasting, watch out for variable interest rates here too – especially if you’re borrowing over a longer term. What is the security arrangement on the loan? Borrowing against personal assets such as your home can cause major problems if you default on repayments. Invoice finance is great for cash flow because you get a high percentage of the invoice value as soon as you raise the invoice. But most providers take a percentage of the invoice as a service charge. Make sure that cut won’t damage your margins. Some providers also attach long contracts to these agreements which require you to sell your debtor book for the agreed period.

How we help

FSB Funding Platform is free to use. We’re 100% transparent about fees and rates, and give you access to the UK’s largest panel of business lenders. We’re also 100% independent. Our only interest is in making sure you get the right funding option for your business need.

Want to know more? Speak to us about funding.

Explore more articles

Helping you to navigate the business funding maze.