Cost of Borrowing

What is cost of borrowing?

This is the amount that a loan will cost you, in total, over the duration of the loan. This includes the total interest paid along with any fees and charges contained within a loan.

Why is cost of borrowing important?

When looking at the type of loan that you require, it is important to look at what the total cost of borrowing would be for a facility. When many people look at loan options, they either only look at the interest rate or the repayments of the loan. Of course, it is important that the repayments fit within your business cash flow, when seeking business finance, this should be in order to improve your business and assist with the growth of your business. Weekly, fortnightly, or monthly repayments that are too high can ultimately cripple your cash flow and in-turn damage your business.

However, when looking at loan options, interest rates and repayments should not be the only thing to look at.

Example of costs of borrowing

When think about cost of borrowing you need think about how much the investment into your business will return.

For example, Sally needed to purchase a new packing machine for her business so that she could create a larger volume of product to sell. She needed the funds quickly, so she opted for a non-bank lender. Sally found. The new machine allowed Sally to produce more income for her business and it was to generate an additional $40,000 in profit.

The loan that she received was at a rate of 24% per annum over a 12-month period. The Cost of Borrowing (that is the amount the loan will cost) will be approximately $11,288.26 in interest and fees.

This means that it would cost Sally $11,288.26 to increase her profit to $40,000.00 just in the first year.

Food for thought

When looking for a business loan, it is a good idea to have a shop around at both conventional lenders and non-bank lenders for the option that will suit your business the best. Have a chat with lenders about the total cost of borrowing for the facility as sometimes a higher interest rate doesn’t always mean a more expensive loan.