Blog9 Mar. 2017

The True Cost of Borrowing

When searching for business finance most people ask themselves a few important questions: How much money can we get? What’s the interest rate? How long will we have to repay what we’ve borrowed? (please read our earlier blog So, Your Business Needs Further Funding!")

But there’s another question that everyone should ask before committing to a final offer:

"What are all the rates and fees associated with this loan?"

So, let’s consider the true cost associated with different short-term funding options, specifically;

  • - Business overdraft
  • - Invoice discounting
  • - Single invoice discounting
  • - Online business loans
  • - Factoring
  • - CFF working capital facility

Business Overdraft
A business overdraft from a bank is often the first point of call for many. The best way to work out the actual cost of a business overdraft from a bank is to use our business overdraft calculator which can be found at

Banks typically charge their clients a rate made up of three parts. The first part is the base rate, one that reflects the overall market costs of the funding and treasury management. The second part is client-specific. It takes into account the balance between the security provided, the track record of the borrower and the specific nature of the funding requirements, among other things. This second part is usually referred to as the "margin" or "margin over base" and is essentially an assessment by the lender of how "risky" that specific loan is. You can find the total actual rate your bank charges you on your latest bank statement. The third part is a monthly fee that most banks charge for the overall overdraft facility. This is not on your bank statement. This fee has various names i.e. Overdraft Management Fee or Line Fee. It applies to the value of the whole overdraft facility whether you use it or not, for example a monthly management fee of 0.12% is actually an annual fee of 1.44% pa charged on the limit of your facility.

Invoice Discounting (Confidential Factoring)
The BNZ and Heartland Bank are two of the largest providers of this type of funding but be aware - the total cost is significantly higher than that of a traditional overdraft facility. The rates offered suggest that they treat the lending as though it’s unsecured. For example, interest rates associated with current asset based working capital facilities offered by the BNZ and Heartland equate to annualised interest rates of somewhere between 18.50% pa and 22.74% pa and this does not take into consideration charges for other supplementary services.

The upshot is that small business is not getting true value from its asset base and is being required to pay a premium of between 7.00% pa and 10.00% pa for these invoice finance facilities.

Single Invoice Discounting
Single invoice discounters typically advance 80% of the invoice value and charge a flat rate for a set period e.g. 5% for 30 days. Therefore, if you “borrow” against an invoice worth $30,000 your fee will be $1,500 (5% of $30,000). However, the true cost of finance (annual percentage rate) is actually 60.80% pa (5% / 30 days x 365 days). This gets worse when you consider you are paying interest on $30,000 yet only receiving 80% ($24,000) upfront.

Single invoice discounting does have a role to play but shop around to ensure you are getting the best deal.

Online Business Loans
Online loans are a relatively new short term financing option for established small businesses that do not qualify for traditional bank financing for reasons including limited amount of time in business, low revenue base and/or weak personal credit. An online lender is willing to take on more risk in exchange for a higher interest rate.

Small businesses must be aware that the tradeoff for the convenience and speed of a typical online loan is its high true cost. An online business loan might look like a great deal—until you factor in the fees, costs, and penalties you didn’t know to look out for. Before committing to an online loan ask the following;

  • - What is the interest rate?
  • - What is the annual percentage rate (APR)?
  • - What is the setup or establishment fee?
  • - What is the late payment fee?
  • - What is the early repayment fee?

This method of obtaining financing involves selling your accounts receivables to a factoring company who also provide administration assistance.

Typically you pay both a finance rate (comparable to an overdraft rate) and an administration fee. Where outsourcing debtor administration and the ability to receive immediate funding against approved invoices is important factoring is a cost effective solution.

It is important to “shop around” to ensure you not only get the best rate but also the best service.

CFF Working Capital Facility
At Cash Flow Funding Limited (CFF) we specialise in the provision of working capital. Our working capital facility will enable improved liquidity, regardless of business size (provided debtors, stock and work in progress are verifiable). The cost of funds to the business will reflect the required funding term of 30-90 days and the costs CFF incur in procuring the required funding.

This is a funding facility. Debtor administration is optional and when chosen additional fees apply. Most prefer if CFF provides the debtor administration as it proves cost effective in both dollar and time spent terms.

A CFF facility allows you to take control of the costs/fee's. The better the internal systems you have, the better the rate!

CFF has a relationship with a leading trading bank so if property security is available CFF can help ensure you (1) maximise borrowing potential, (2) minimize cost and (3) ensure your personal borrowing and business borrowing are unbundled.

Access to working capital helps support business growth and profitability. But, there is a smart way to access working capital and control the cost of borrowing. Stay vigilant, do your homework on the options available and ask questions!