A business owner recently shared a frustrating discovery. She had compared two loan offers for $80,000: one at 1.5% monthly, another at 1.8% monthly. The choice seemed obvious. Six months later, after factoring in processing fees, an early settlement penalty when cash flow improved, and a late payment charge during a slow collection month, the "cheaper" loan had cost her $2,400 more than the alternative would have.
This is not unusual. Most SME owners focus on the advertised interest rate because it is the most visible number. But the true cost of a business loan involves several components that only become apparent when you read the fine print—or worse, when you receive an unexpected charge.
Beyond the interest rate
Interest is just one piece of the cost equation. Here are the factors that quietly add to what you actually pay:
Processing fees vary significantly across lenders. Some charge 2-3%, others charge 5% or more. A 5% processing fee on a $100,000 loan is $5,000—a meaningful sum that many borrowers mentally separate from "the cost of the loan" even though it absolutely is. Pay attention to when this fee is charged: some lenders deduct it from your disbursement, meaning you receive less than the approved amount but repay the full principal.
Late payment penalties compound quickly. A typical late fee might be 2-5% of the overdue instalment, plus daily interest on the arrears. One delayed payment during a tough month can add hundreds of dollars. Two or three late payments across a loan tenure can add thousands.
Early repayment penalties catch many borrowers off guard. You might assume that paying off a loan early saves money—and it should. But some lenders charge 1-3% of the remaining principal as a prepayment fee, or impose lock-in periods during which early settlement is not permitted. Others use interest calculation methods that minimise what you save by settling early.
Administrative and legal fees appear in various forms: documentation fees, stamp duty, facility arrangement fees, or charges for issuing statements and letters. Individually small, they accumulate.
Insurance requirements from some lenders add another layer. If a lender requires credit insurance or keyman insurance as a condition of the facility, factor that premium into your total cost.
Calculating your true loan cost
A simple framework helps you compare offers accurately. For any loan you are considering, calculate:
Total interest: Monthly instalment multiplied by tenure, minus principal. For a $100,000 loan at 1.5% monthly over 12 months, total interest is approximately $18,000.
All fees combined: Processing fee plus any administrative charges, legal fees, or insurance premiums. If the processing fee is 5%, that adds $5,000.
Minus rebates or savings: Some lenders offer fee rebates for good payment behaviour or interest rebates for early settlement. If a lender returns 50% of processing fees for perfect payment, that reduces your cost by $2,500.
Consider two hypothetical $100,000 loans over 12 months:
Loan A: 1.4% monthly rate, 5% processing fee, 2% early repayment penalty, no rebates. If you repay on time for the full tenure, total cost is approximately $16,800 interest plus $5,000 fees, totalling $21,800. If you settle early at month 8, the early repayment penalty adds roughly $800.
Loan B: 1.6% monthly rate, 5% processing fee, zero early repayment penalty after 3 months, 50% fee rebate for perfect payment. Full tenure cost with perfect payment is approximately $19,200 interest plus $2,500 net fees (after rebate), totalling $21,700. If you settle early at month 8, you save on interest with no penalty.
The loan with the higher rate costs less in most realistic scenarios.
Questions to ask before signing
Before committing to any business loan, get clear answers to these questions:
What is the total cost of this facility, including all fees? Ask for a single number that represents everything you will pay if you complete the loan as scheduled.
What happens if I repay early? Is there a penalty? A lock-in period? How is the interest rebate calculated—using the Rule of 78 or simple linear calculation?
Are there any rebates or incentives for on-time payment? Not all lenders offer this, but those who do signal a partnership mindset rather than a penalty-focused approach.
Is the processing fee refundable if my application is rejected? Some lenders charge non-refundable application fees before approval.
What are the late payment penalties? Understand exactly what you will owe if an instalment is delayed by a week, two weeks, or a month.
Are there any other fees I should know about? Give the lender an opportunity to disclose anything not obvious in the term sheet.
Lenders who reward responsible borrowers
A shift is happening in SME lending. Traditional models relied heavily on penalties: charge more when borrowers struggle, offer little benefit when they perform well. The relationship was transactional at best, adversarial at worst.
Modern alternative lenders are moving toward partnership approaches. The logic is straightforward: when borrowers repay responsibly, lenders have lower servicing costs and better portfolio performance. Sharing some of that benefit with the borrower creates alignment.
This shows up in structures like processing fee rebates for perfect payment records, zero early repayment penalties that let borrowers settle when cash flow allows, and linear interest calculations that provide fair rebates on early settlement. Credezo, for example, offers a 50% processing fee rebate for borrowers who maintain perfect payment throughout their tenure, plus zero early repayment penalty after the first 3 months. These are not marketing gimmicks—they represent a different philosophy about the lender-borrower relationship.
When evaluating lenders, look for terms that reward the behaviour you intend to demonstrate.
Key takeaway
The cheapest-looking loan is not always the cheapest loan. Smart borrowers calculate total cost across realistic scenarios—including the possibility of early settlement or an occasional slow month. Look for lenders whose terms align with how you actually intend to repay, and whose structures reward responsible borrowing rather than simply penalising difficulty.
If you want to understand exactly what a loan will cost before you commit, apply for financing and we will provide a transparent breakdown of all costs, rebates, and what-if scenarios based on your situation.