Costs of finance

The cost of finance varies widely and may be influenced by availability, security, credit rating and timing. This page gives more detail about the factors that influence short-term and medium/long-term finance.

Short-term finance

The cost of cashflow finance/invoice factoring will often include a charge, similar to an interest charge, which is calculated as a percentage of the loan value (typically between 2.5% and 3.5% over base rate). Additionally a service charge based on a percentage of the business sales, typically between 0.5% and 3%, will also be payable. 

The cost of a bank overdraft will include an annual arrangement or maintenance fee, plus interest on the overdrawn amount at the end of each day and other charges, such as a non-utilisation fee. The interest charged will vary depending on the risk of default and a higher rate will be charged for utilising an unauthorised facility, as well as unauthorised borrowing charges.

Business credit cards can be a very expensive form of short-term finance in terms of interest charges and fees. However, if the card holder pays the balance on time, the only cost is regular fees associated with the card.

A simple barter involves no cost as this involves exchanging goods and/or services for goods and/or services of the same value. Compared to one-to-one bartering, concerns over unequal exchanges are reduced in a barter exchange. Online bartering exchanges attract fees, typically an initial registration fee or a monthly membership fee of between £20 and £40. The exchange will charge between 5% and 10% on transactions.

There are no direct costs of trade credit, however, there are indirect costs, such as the loss of early payment discount; the effect on the cost of goods and other terms in your relationship with your supplier if you do not adhere to the agreed trade credit terms; the cost of employing someone to chase trade credit that has been granted or make payments when they are due; and a working capital cost if the net effect of receiving and providing trade credit puts your business in a negative working capital situation (this would need additional funding).

Medium-term and long-term finance

The primary cost of a bank loan is interest, which will vary depending on risk of default and which will be lower if the loan is secured and/or when a loan covenant or other information is required by the lender as a condition of granting the loan and as a condition of continued availability. Other fees and charges may be applicable such as arrangement fees and insurance.

The cost of hire purchase HP/leasing will include rent/instalments covering depreciation of the asset, interest to cover capital costs and maintenance charges. The higher cost of HP and leasing offers more flexibility than outright ownership of an asset. Interest rates will be more favourable for assets with higher resale value (ie machinery, agricultural equipment, vehicles). Assets that are considered ‘soft’ due to their low resale value (ie printers, vending machines, office furniture) will be subject to less favourable rates.

There are five main direct costs that need to be considered when obtaining finance from friends and family:

  • producing a formal agreement
  • interest (if applicable)
  • legal advice
  • legal fees, transfer fees
  • accountancy, bookkeeping, management accounts

The main costs of stock market listings arise from the complexity of the flotation process, which entails demanding legal, regulatory, financial and marketing aspects. Specialised professional advisers are needed to assist with the flotation process and their fees represent the bulk of the direct costs of a listing, which depending on the size of the flotation may reach a six-figure sum. A business seeking a stock market listing would normally need to appoint the following advisers:

  • corporate adviser
  • stockbroker
  • corporate lawyer
  • accountant 
  • public relations firm (for large listings).

Further direct costs of listing are the admission and annual fees payable to the stock market. The admission fee is based on the market capitalisation of the company on the day of admission while the annual fee is fixed for all companies. The current minimum fee for admission to the AIM (up to £5m of capitalisation) is £6,720 whilst the current annual fee is £5,350. 

Options premium is the price of an option charged by the writer or sold on an exchange market. Option value is derived from intrinsic value (difference between current market rate and future strike price) + time value + level of price volatility.  Option prices will generally be above pure option value due to reasons such as to the added value the seller is providing by offering non-standard structured solutions and the seller’s incentive to maximise returns. 


When applying for grants you should consider:

  • covenant compliance costs 
  • professional advice
  • use of a designated supplier.

Another cost of grant funding is maintaining the restrictions the grant funder may impose. There will be certain key points in time where your business will have to show compliance with the conditions of the grant.

When obtaining finance from a business angel you need to consider:

  • covenant compliance costs 
  • professional advice
  • reporting obligations
  • interest or equity payments
  • an exit plan.

Trade loans

When obtaining trade loans you need to consider:

  • trade loans are normally provided at a rate of interest on the owed amount. Other fees and charges may be applicable, depending on the type of loan, tenor and on the lender
  • arrangement fees are a commitment or administration charge payable to the lender to reserve the funds and to cover opening costs. Fees will vary depending on the complexity of the business, its size and risk
  • interest is charged and will vary depending on risk of default. Trade loans are normally provided in conjunction with other trade products (such as documentary credits) and the cost of these needs to be taken into account when considering affordability.