22nd November 2018

What is the REAL cost of funding?

Almost half of all SMEs have experienced barriers to accessing finance, a quarter of those at the point of growth, just when they need it the most. With demand for traditional bank loans at a record low in 2017/18 (British Business Bank, Small Business Finance Report 17/18), small businesses in the UK are increasingly looking away from bank lending and towards more diverse funding options.

The many types of funding available can lead to confusion and consequently, SMEs do not take advantage of the funding options available to them. Pricing can be a particularly grey area, with the true cost of funding not clear due to additional charges and fees baked into the facility itself. In addition to the obvious service charges and monthly interest, there are sometimes less obvious charges that increase the cost of borrowing and that SMEs should be aware of.


Application or Origination fees – alongside the cost of the time each business spends putting a case together for funding, there will almost always be a cost from the lender for the administrative cost of processing the application. Be aware of application fees that are payable whether you are offered financing or not. Borrowers should also be clear that if fees and charges are offered to be added to the financing that there will be an inherent additional cost in interest over the life of the funding as the amount borrowed has increased.

Pre-payment charges – if a business is in the position to repay funding early, it may seem logical to do so. However, there may be a penalty – typically this is a percentage of the total remaining balance. Always check the terms of the facility agreement before deciding whether paying early will be beneficial, or indeed if you believe there is a possibility that you might repay early then funding which has early repayment penalties might not be appropriate funding at all.

Late payment charges – every business has the right to charge interest on late payments, typically chargeable from the end of the agreed credit period. This will vary according to lender, but may be based on additional interest charges and possibly an additional fee to cover the lender’s administrative costs.

Insufficient funds – a charge could be made should there be insufficient funds in the business account to meet the monthly scheduled payment.

Application of the interest charges – Be careful to note the way the funding costs are applied to the funding. For instance, with a flat rate, the interest can be added to the loan at the start of the loan, meaning that whilst you are repaying the capital on the loan over the term the interest has been charged on the initial loan amount. Flat rates can look very competitive but if applied in this way can work out to be far more expensive than the rate implies.


We take pride in the fact that the cost of funding at Credit4 is simple and transparent. We work with each business to ensure the facility, fees and charges are fully explained and understood.

Call us today on 020 3637 0570 to discuss how we can help support your or your clients’ plans for business growth.