What the borrowing costs, once the fees are in it
Business lending is quoted the way consumer lending is, as a rate, and it is charged the way consumer lending is, as a rate plus a set of fees that come out of the drawdown. An arrangement or packaging fee as a percentage, a documentation or closing fee as a flat sum, sometimes a guarantee fee where a public scheme stands behind the loan.
All of them are paid at the start and none of them appear in the quoted rate. The figure this page prints beside the payment is what the money actually costs once they are counted: the rate at which the amount reaching the business and the payments leaving it balance out.
On a short facility the gap between the two rates is wide. Fees are paid once whatever the term, so the shorter the loan the more they add to the annual cost. A twelve-month facility at a modest rate with a few per cent in fees is not a modest-rate facility at all.
Where the fees sit, and the alternative
Here the fees come out of the proceeds. The business owes the whole amount borrowed and repays it on that schedule, and what arrives is less by the fees.
The other arrangement, where fees are added to the balance and carry interest of their own, costs more. To price that, put the total of loan plus fees into the amount field: the payment shown is then the one that would actually be charged.
Either way it is worth separating the amount you need from the amount to borrow. A facility sized at the cash requirement is short of it by the fees.
Comparing a loan against the alternatives
The rate including fees is the figure that makes a term loan comparable with anything else. Invoice finance, a merchant cash advance and a supplier's early settlement discount are all quoted in units that are not annual rates, and converting them is the only way to see which is dearer. An advance repaid in six months at a fee that looks small is frequently the most expensive money in the room.
The same figure is what makes a loan comparable with not borrowing at all. Money that costs a given rate a year has to earn more than that inside the business, and the IRR calculator prices the project side of that comparison.
What this page does not model
It is a fixed-rate, fully amortising term loan and nothing else. There is no interest-only period, no balloon payment at the end, no drawdown in tranches, no revolving facility, no variable rate tied to a reference and no covenant.
Nor is there any tax. Interest on business borrowing is commonly deductible, which lowers the real cost by the rate at which profit is taxed, and the deduction rules differ by country and by how the business is structured. Security, personal guarantees and what happens on default are all outside arithmetic entirely.