Case study
The headline rate is rarely the real cost.
Commercial borrowing looks like a number - an interest rate. In practice, the cost of borrowing is a combination of rate, fees, payment schedule, and contractual terms. Any one of them can shift the true cost a long way from the headline.
The figures
A routine-looking facility with a 70% effective APR.
A UK business borrowed £20,000 under what looked like a routine commercial facility. Eighteen months later, they had repaid £29,052. That is a £9,052 cost on a £20,000 loan held for a year and a half - an effective annualised cost of more than 70%, on a facility whose headline rate would never have suggested it.
Nothing was illegal. Nothing was even unusual, by current market standards. The cost sat in the structure: an arrangement fee, a front-loaded interest pattern, an exit fee, and a repayment schedule that compressed most of the repayments into the first twelve months.
An independent review carried out before the signature would have surfaced the full picture. The review would not have been a rejection of the facility - the business may still have wanted to proceed. It would have been a clear-eyed decision instead of an expensive surprise.
Identifying details withheld. The figures are real.
Three reasons the cost hides
Where the real cost lives.
Fees vs rate
The fees are not the rate.
Arrangement fees, commitment fees, monitoring fees and exit fees are rarely expressed as APR. They are expressed in pounds or basis points. The headline rate looks competitive; the aggregate cost is not.
Schedule vs term
The schedule is not the term.
A 36-month facility with repayments front-loaded into the first 18 months is not a 36-month facility for APR purposes. The effective cost of capital is materially higher than the stated rate.
Security vs loan
The security is not the loan.
Personal guarantees, debentures, and cross-default clauses change the downside risk without changing the headline cost. They change what happens if things go wrong, not what things cost if they go right.
What a review does about it
Same care. Different side of the table.
A review reads the facility letter, fee schedule, and security pack with the same care a lender’s credit committee reads the application. The difference is the side of the table we sit on. We work for the borrower. We take no commission from any lender. The fee you pay us is our only income on the engagement.
Next step
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