Quick answer
The true cost of a business loan is everything you repay and pay in fees, minus the cash you actually receive. Add up all repayments, add every fee (including ones deducted from the advance), then subtract the net amount that lands in your account. Divide by the years you hold the money to compare loans of different lengths fairly. Work in dollars, not headline figures.
Key points
- True cost = total you pay out (repayments plus fees) minus the net cash you receive
- Fees taken from the advance shrink your net proceeds, so a $100k loan may put less in your account
- Divide total cost by years of use to compare a 12-month loan with a five-year one
- Fixed-cost products (factor rates, flat fees) cost the same whether you repay in month three or month twelve
- Interest and most borrowing costs are generally tax deductible, so ask your accountant for the after-tax figure
Ask three lenders what a loan costs and you will get three answers in three different units: a monthly figure, a per-year figure, a “fee of” figure. None of them are lies. They just aren’t comparable, and the owner is left holding the maths.
The fix is to stop trusting units and go back to dollars. Every loan, whatever it is called, has the same shape: some money arrives, some money leaves. The gap between the two is the cost. This guide shows you how to measure that gap in five lines.
What is the “true cost” of a business loan?
It is the total cash that leaves your business because of the loan, minus the cash that actually arrives. Not the face value, not the monthly instalment, not the interest line on the letter of offer on its own.
Three things make the headline misleading:
- Fees come out of the advance. A $100k loan with $3,100 of establishment and legal costs deducted puts $96,900 in your account, yet you repay on the full $100k.
- Interest is not the only charge. Account fees, line fees, valuation costs, broker fees and exit fees all sit outside the interest figure.
- Time isn’t equal. A cost of $9,000 across 12 months is a very different thing from $9,000 across four years.
The fees guide lists every charge in order of when it lands. This page takes the next step: turning them into one comparable number.
The five-line cost sheet
Copy this onto a page for each offer you are considering.
| Line | What goes in it |
|---|---|
| 1. Net proceeds | Loan amount minus every fee or prepaid amount deducted at settlement |
| 2. Total repayments | Regular repayment multiplied by the number of repayments, plus any balloon or final payment |
| 3. Fees paid later | Account fees, line fees, monthly service fees, annual reviews |
| 4. True cost | Line 2 plus line 3, minus line 1 |
| 5. Cost per year of use | Line 4 divided by the years the money is outstanding |
Line 5 is the one most owners skip, and it is the line that stops you comparing a nine-month product with a five-year term as though they were the same animal.
A worked example in dollars
Here is an illustrative case. A fit-out business needs $100k of working capital and has an offer over 36 months. The figures are examples to show the method, not a quote.
| Offer | |
|---|---|
| Loan amount | $100,000 |
| Establishment fee, taken at settlement | $2,000 |
| Legal and registration costs, taken at settlement | $1,100 |
| Net proceeds (line 1) | $96,900 |
| Monthly repayment | $3,200 |
| Total repayments, 36 months (line 2) | $115,200 |
| Account fee, $30 a month (line 3) | $1,080 |
| True cost (line 2 + line 3 − line 1) | $19,380 |
| Cost per year of use (line 5) | $6,460 |
Notice what happened. The lender’s own paperwork would show interest of $15,200: the difference between $115,200 of repayments and the $100,000 headline. The real cost is $19,380, about $4,180 higher, because of $3,100 of upfront deductions and $1,080 of account fees. Cost per year of use is $6,460.
One more subtlety: most of the loan is repaid gradually, so you don’t hold $96,900 for three full years. The average balance outstanding is considerably lower. That is why a fully fair comparison between a reducing balance loan and a fixed-cost product needs more than a total, and why the loan cost comparison calculator is worth running on any pair of offers.
If you would rather have someone run your own figures with you, the short enquiry form is a no-obligation way to start.
How do fixed-cost products change the sum?
Some products set the cost at the start and don’t reduce it as you repay. A factor rate is the best known: the lender multiplies the amount advanced by a fixed number, and that sum is what you repay, whether it takes six months or twelve. Our factor rate calculator does the arithmetic.
The practical consequences:
- Early repayment saves little. If the cost is fixed, paying in month four rather than month eight may not change the total at all.
- Short term does not mean cheap. A cost of $8,000 on a six-month advance is equivalent to $16,000 per year of use, which is line 5 doing its job.
- Repayment frequency matters. Daily or weekly debits pull cash out of the business faster than monthly ones, even when the total is identical. See the guide on daily, weekly and monthly repayments.
None of this makes these products bad. A fixed cost with no surprises is exactly what some owners want when they are chasing a quick opportunity. It just means line 5 should be on your sheet before you decide.
What do banks and lenders not put in the headline?
Plenty of useful costs hide in the conditions rather than the pricing. When you request an offer, ask for answers to these in writing:
- What is deducted before I receive the money? That gives you line 1.
- What happens if I repay early? Break costs, exit fees or a minimum interest period change line 4 if you plan to repay ahead of time.
- Is there a line fee, an unused-limit fee or an annual review fee? These apply to overdrafts and lines of credit even when you borrow nothing.
- What does default cost? Default interest and enforcement costs rarely feature in a comparison but are worth knowing.
- Who pays for the valuation and legal work if the loan does not proceed?
Banks are often the cheapest source of money, and when your business fits their criteria it is worth taking an offer seriously. The same cost sheet applies to a bank offer as to any other, and it frequently shows the bank winning by a wide margin. Where the sheet shows a bank has said no and a different lender is the realistic route, it lets you pay for speed or flexibility knowingly rather than blindly.
Why a comparison rate will not rescue you
Many owners ask for “the comparison rate” and are surprised that one doesn’t exist. Comparison rates are a consumer credit device built to line up personal loans, and business loans generally sit outside that regime. Our guide to comparison rates and business loans covers what to use instead.
The cost sheet above is that substitute. It is more work than reading a single number, but it can’t be gamed by moving cost between fees and interest, because it counts both.
You do have some protection on the contract itself. Since November 2023, the unfair contract terms rules cover many small business loans, including loans up to $5m for businesses with under 100 staff or under $10m turnover, according to ASIC. The headline price is excluded from the test, but unusual penalty or variation clauses are not. That protection is no substitute for reading the terms, but it is a reason to push back on a clause that looks one-sided.
Should you think about the after-tax cost?
Interest and many borrowing costs are generally deductible when the money earns business income, so the figure that matters to your cash position is lower than line 4. Some costs are written off over the life of the loan rather than claimed at once, and the rules differ for sole traders, companies and trusts. Rather than guess, take your sheet to your accountant and ask for the after-tax number. It also helps to ask what the loan will do to your BAS and cash flow, not only your tax return.
Common mistakes when calculating loan cost
- Comparing monthly repayments across different terms. A lower repayment over a longer term usually costs more in total.
- Ignoring the settlement deductions. If you need $50k exactly, borrow enough to cover them.
- Forgetting that cost is reduced when you repay a reducing balance loan early. It is not reduced on fixed-cost products.
- Counting only the first year of fees. Account fees repeat every month.
- Looking at cost alone. Security, covenants, flexibility and speed are real value and belong in the decision, which is where comparing two loan offers picks up.
Ready to see real numbers for your business?
A sheet like this is only as good as the figures going into it, and the quickest way to get real ones is to tell us what you need. The enquiry takes roughly a minute. Asking leaves your credit file alone, so you can find out where you stand without a mark against you. We keep your details with us instead of firing them off to a crowd of lenders, and a person on our team reads what you’ve written and rings you to go through it.
One request: be careful with the amount, the purpose and your timing. Accurate answers mean the first option we put in front of you is likely to be the right one.
Frequently asked questions
How do I work out the total cost of a business loan?
Take the regular repayment times the number of repayments, add any balloon or final payment, then add every fee that isn't already inside the repayment. Subtract the amount you actually received in your account. What is left is the dollar cost of borrowing.
What is the difference between the loan amount and net proceeds?
The loan amount is the figure on the contract. Net proceeds is what reaches your account after the lender deducts establishment fees, prepaid interest, legal costs or any payout of existing debt. Always ask for the net figure before you accept an offer.
Is there a comparison rate for business loans?
Comparison rates are a consumer credit idea, and business loans are generally outside that regime. So you cannot rely on one number to line up two offers. Build your own comparison in dollars using total cost and net proceeds, as set out in this guide.
Can I deduct the cost of a business loan?
Interest and many borrowing costs on money used to earn business income are generally deductible, although some costs are spread over several years rather than claimed at once. The treatment depends on your structure and on what the loan funded, so confirm it with your accountant.
Why does a shorter loan sometimes cost less in total but more per year?
Less time means less interest in total, but the fees and the pricing of fast products are often loaded into a short window. Dividing total cost by the years the money is in use shows the cost of each year of borrowing and lets you compare fairly.
Do early repayments always save money?
On a reducing balance loan, usually yes, apart from any break or exit fee. On a factor rate or flat fee product the cost is often fixed at the start, so paying early may save little or nothing. Ask the lender to show the payout figure at month six, not just at the end.