Quick answer
The total cost of a business loan is everything you pay beyond the amount borrowed: the total of all repayments plus every fee, minus the loan amount. Divide that cost by the cash you actually receive to get the cost per dollar, and by the term to get the cost per month. These dollar measures let you compare offers however they are quoted.
Key points
- Total cost = repayments + fees − amount borrowed.
- Cost per dollar received is the fairest single comparison.
- Cost per month matters when terms differ.
- Include fees deducted upfront and fees paid along the way.
Checklist
- Loan amount
- Fees deducted from the advance
- Instalment amount and number of instalments
- Balloon or final payment
- Ongoing and expected event fees
- Term in months
Ask five business lenders what a loan costs and you may get five different kinds of answer: an annual rate, a monthly rate, a fixed fee, a multiplier or simply the repayment. None of them is necessarily wrong, but none can be compared directly with the others. The one measure that works for every offer is dollars. This guide shows you how to calculate it.
The core formula
Total cost of finance = total of all repayments + all fees − loan amount
That figure is what the business pays for the use of the money. It includes interest, margins, factor pricing and fees, whatever the lender calls them.
Step by step
- Write down the loan amount as stated in the offer.
- Note fees deducted from the advance. These reduce your cash in hand.
- Work out the total of repayments. Instalment × number of instalments, plus any balloon or final payment.
- Add other fees you will pay, such as monthly account fees across the term and discharge fees.
- Calculate total cost using the formula above.
- Calculate cash received = loan amount − fees deducted.
- Calculate cost per dollar = total cost ÷ cash received.
- Calculate cost per month = total cost ÷ term in months.
The true cost calculator does steps 5 to 8 automatically.
An illustrative worked example
These numbers are made up to show the method, not to suggest a typical price.
| Item | Offer A | Offer B |
|---|---|---|
| Loan amount | $100,000 | $100,000 |
| Fees deducted from advance | $4,000 | $0 |
| Total of repayments | $118,000 | $121,000 |
| Other fees over term | $1,200 | $0 |
| Term | 24 months | 24 months |
| Total cost | $23,200 | $21,000 |
| Cash received | $96,000 | $100,000 |
| Cost per dollar received | 24.2 cents | 21.0 cents |
| Cost per month | $967 | $875 |
Offer A has lower repayments in total, but once fees are included and you account for the smaller cash amount, Offer B is cheaper on every measure.
Why cost per dollar received matters
Two loans for the same headline amount can put different amounts of cash in your account. Cost per dollar received captures that. It is the fairest single number for comparing offers with similar terms.
When terms differ, look at cost per month too
A three-year loan will usually cost more in total than a one-year loan for the same amount, simply because you have the money for longer. Cost per month shows how much each month of borrowing costs, which helps when you are choosing between terms. Our guide to choosing a loan term explains the trade-off.
Do not forget the balloon
If a loan has a balloon or residual, include it in the total of repayments. A low regular repayment with a large balloon can look cheap until the final payment is added in. Read our guide to balloon payments.
What total cost does not tell you
Dollars are the right way to compare price, but price is only part of an offer. Security, guarantees, early payout terms, default clauses and flexibility all matter. A loan that is slightly dearer but leaves your home out of it, or lets you repay early without penalty, may be the better choice. Our offer review guide covers the rest.
Making the comparison with real quotes
When you have two or three written offers, put them into the offer comparison calculator. It shows cash in hand, total cost, cost per dollar, cost per month and repayment size side by side, and highlights the cheapest on each measure. Our guide to comparing two loan offers explains how to weigh the results.
Is the cost worth it?
Once you know the total cost, ask what the money will earn or save. If finance lets you take a supplier discount larger than the cost, fulfil a profitable order or avoid a growing penalty, it may be well worth paying. If the benefit is vague, even a cheap loan can be a poor decision.
A note on comparison rates
You may see comparison rates in consumer lending, where they are regulated. Business loans are generally not required to show one, and a rate still would not capture every feature. Dollars remain the clearest guide.
Including costs outside the loan
Some costs of borrowing never appear in the lender’s paperwork. Your own solicitor’s fees for reviewing documents, an accountant’s fee for preparing financial statements, insurance the lender requires on a financed asset and the time spent gathering documents are all real costs of the loan. You do not need to include every one in your comparison, but on a small or short loan they can change which option is genuinely cheaper. If one offer requires independent legal advice for guarantors and another does not, factor that in.
Revisit the cost during the loan
Total cost is not fixed if your loan has a variable price, reviewable fees or a facility you draw and repay. Each year, compare what you have actually paid against what you expected. If costs have crept up, it may be time to refinance or restructure.
Want to know if your offer is competitive?
If you have worked out the total cost and want to know whether there might be a better fit for your business, make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than a crowd. Include the total cost and term of your current offer in your enquiry so the comparison is like for like.
Frequently asked questions
Why not just compare interest rates?
Business loans are quoted in different ways, and a rate does not capture upfront fees, ongoing charges or how the rate is applied. Dollar totals work for any offer and cannot be presented misleadingly.
What if the offer doesn't state the total repayable?
Multiply the instalment by the number of instalments, add any balloon, then add fees. Ask the lender to confirm the total in writing.
Should I include fees I might not pay, like dishonour fees?
Include fees you will definitely pay. Note conditional fees separately so you know the cost if something goes wrong, but compare offers mainly on certain costs.
How does early repayment affect total cost?
It depends on the pricing. On some loans repaying early reduces cost substantially; on others most of the cost is still payable. Ask for a payout example.
Is the cheapest loan always the best?
No. Security, guarantees, flexibility and payout terms can make a slightly dearer loan the better choice.
Does GST apply to loan fees?
Interest and many lending fees are generally input-taxed financial supplies, so GST is not usually charged on them, but some third-party costs such as legal fees can include GST. Check the fee schedule and ask your accountant how each is treated.
Sources and further reading
We are an information site, so we do not rank lenders, publish interest rates or accept payment to feature a product. Every page is written and checked by our editorial team against official sources. Read our editorial policy and how we are funded.
