Worked Examples and Checklists
Comparing three business loan offers: a worked example on total cost
A step-by-step comparison of three illustrative Australian small business loan offers, adjusting for deducted fees, monthly fees and repayment terms to find the real cost.
To compare business loan offers fairly, put them on the same amount and term, find the cash you actually receive, add every fee to the interest, and then convert the result into a single effective annual cost. In the worked example below, the offer with a 13.2% rate turns out to be about $4,300 cheaper than the 14.5% offer, but both cost far more than a 8.9% bank offer once its fees are counted. The headline rate ordered them correctly here, but the size of the gaps only shows up when fees are included, and a different fee structure could have changed the order.
This guide is part of the business loan application checklist. All offers are illustrative, not real lender quotes.
Step 1: line up the offers
A cabinet maker needs $100,000 over three years for new machinery and working capital. Three offers arrive:
| Offer A | Offer B | Offer C | |
|---|---|---|---|
| Lender type | Bank | Online lender | Online lender |
| Security | GSA + director guarantee | Director guarantee | Director guarantee |
| Rate | 8.9% variable | 14.5% fixed | 13.2% fixed |
| Upfront fees | $1,200, paid separately | 2.5% origination ($2,500), deducted | $500, deducted |
| Ongoing fees | $15 a month | None | None |
| Repayments | Monthly | Monthly | Weekly |
| Early repayment | No fee on variable rate | 3% of balance | All remaining interest to term |
| Speed | 3 weeks | 2 days | 2 days |
Step 2: cash actually received
- A: $100,000 (fee paid from the business's own funds)
- B: $100,000 − $2,500 = $97,500
- C: $100,000 − $500 = $99,500
The net proceeds calculator does this step for any offer.
Step 3: repayments and total interest
Using the standard repayment formula on $100,000 over 36 months (C shown as a monthly equivalent of its weekly repayments):
| Monthly repayment | Total repaid | Interest | |
|---|---|---|---|
| A at 8.9% | about $3,175 | about $114,310 | about $14,310 |
| B at 14.5% | about $3,442 | about $123,920 | about $23,920 |
| C at 13.2% | about $3,379 (about $780 a week) | about $121,650 | about $21,650 |
You can reproduce each line with the repayment calculator.
Step 4: add every fee
| Interest | Upfront fees | Ongoing fees | Total cost of the loan | |
|---|---|---|---|---|
| A | $14,310 | $1,200 | $15 × 36 = $540 | about $16,050 |
| B | $23,920 | $2,500 | $0 | about $26,420 |
| C | $21,650 | $500 | $0 | about $22,150 |
Step 5: convert to an effective annual cost
The effective annual cost is the interest rate at which the cash you receive equals the present value of everything you pay. Calculated for these offers:
- A: about 10.1% a year (the $1,200 fee and $15 monthly fee add about 1.2 points)
- B: about 16.3% a year (the deducted 2.5% fee adds about 1.8 points)
- C: about 13.6% a year
This is the number to compare, because it includes fees and the timing of payments. There is no regulated comparison rate for business loans, so most lenders will not calculate it for you.
Step 6: weigh the conditions
Cost is not everything:
- Speed. If the machinery supplier holds a discounted price for only one week, A may not be possible. Ask whether B or C could be refinanced into a cheaper loan later, and what that would cost.
- Early repayment. C requires all remaining interest if you pay early, which removes any benefit of refinancing. B charges 3% of the balance: on $50,000 outstanding after 18 months, that is $1,500. A has no fee on its variable rate.
- Security. A takes a GSA over the business, which could make future equipment or invoice finance harder to arrange. See the PPSR guide.
- Rate risk. A is variable, so it rises if the lender raises its rates. If A rose by 1 point after the first year, the total cost would increase by roughly $770 over the remaining two years. See fixed vs variable.
- Weekly repayments. C takes money every week; check that suits your cash cycle.
Step 7: decide
On these numbers, Offer A is the cheapest by about $6,100 over Offer C and about $10,400 over Offer B, even after allowing for a possible rate rise. If the business can wait three weeks and accept a GSA, A is the clear choice. If speed is essential, C is cheaper than B, but its early repayment clause means you would be committed to the full term.
Write down the effective cost and conditions of each offer before speaking to the lenders again. Lenders sometimes reduce fees for a well-prepared applicant with a competing written offer.
Related guides
If one of your offers is quoted as a factor rate, convert it first with the factor rate guide, and check the amounts offered against your borrowing capacity.
Frequently asked questions
Why not just compare repayments?
Repayments ignore deducted fees, monthly fees and early repayment costs. Two loans with similar repayments can have very different total costs.
How do I calculate the effective annual cost myself?
Spreadsheet IRR or RATE functions can do it: enter the cash received as a positive amount and each repayment (plus ongoing fees) as negative amounts, then annualise the monthly result. Your accountant can check it.
Is a weekly repayment loan cheaper?
Weekly repayments reduce the balance slightly faster, which lowers interest a little, but lenders that use weekly or daily repayments often price higher overall.
Should I tell lenders about other offers?
You can. Show written offers if you want them to compete. Never misstate an offer; that could be misleading conduct on your part.
Sources
- ASIC Moneysmart — general guidance on comparing loan costs
- business.gov.au — choosing the right finance
- Australian Banking Association — Banking Code of Practice — information banks provide to small business borrowers
- Australian Financial Complaints Authority — disputes about fees and loan terms
