Define “cheap” as the full cost of borrowing
The total cost depends on the amount borrowed, the interest rate, how interest is calculated, the term and any compulsory fees. Compare the total amount repayable and payment schedule, not just a headline rate or a low monthly figure.
Check whether the quoted rate is fixed or variable and whether the lender has included every required charge. Ask for a written repayment schedule if the cost is not clear.
Look for fees and conditions
An arrangement fee, administration charge, late-payment fee or early-repayment charge can change the overall cost. Some fees may be payable at a different time from the regular instalments, so include them when comparing offers.
Check whether a lender charges for an application, valuation or other service, and whether a fee remains payable if the application does not complete. Read the offer and the lender’s terms rather than assuming every advertised example applies to your business.
A longer term can cost more overall
Extending the repayment term can reduce each instalment, but interest may accrue for longer and the total repayable can rise. A shorter term can cost less overall while creating higher payments that put more pressure on cash flow.
Model the payment schedule against a cautious forecast, including existing borrowing and periods when sales may be lower. The business should be able to meet repayments without depending on an uncertain increase in revenue.
Consider the security and guarantee, not only the price
A secured loan may have a different rate or terms from unsecured borrowing, but the asset used as security could be at risk if the business does not repay. A personal guarantee can also expose the guarantor’s personal finances.
A lower-cost offer may not be the right choice if the repayment structure, security or guarantee does not suit the business. Compare the full agreement and consider advice before accepting terms you do not understand.
Compare offers on the same basis
Use the same borrowing amount and a similar term when comparing. If offers differ, ask the lender to explain how each difference changes the payment schedule and total cost.
- Amount paid to the business after any deductions.
- Total amount repayable, including required fees.
- Payment amount, frequency and first payment date.
- Fixed or variable pricing and what can cause it to change.
- Security, personal guarantees and early repayment conditions.
A few things worth knowing
Common questions
How can I find a cheap business loan?
Compare the total amount repayable, fees, rate, term and repayment schedule for the same borrowing amount. A low advertised rate or monthly payment on its own does not show which loan costs less overall.
Is a secured business loan cheaper than an unsecured one?
Pricing varies by lender, applicant and product. A secured loan may have different terms, but it puts the agreed asset at risk. Compare actual offers and consider whether the security requirement is acceptable to the business.
Does a longer business loan term reduce the cost?
It may reduce each scheduled payment, but interest can accrue for longer, increasing the total repayable. Compare both the payment size and full-term cost.