UK businesses can calculate the cost of short-term business loans by understanding the total amount required, approximate interest rates, early repayment charges, loan fees, and APR. Don’t just compare the headline interest rate; compare the total costs as well.
It may include administrative charges, loan establishment costs, closure fees, broker fees, missed and late payment charges. Overall short-term business funding costs in the UK depend on the lender, borrowing amount, repayment period, business finances, and loan eligibility.
What are short-term business loans?
Short-term business loans are financial products suitable for meeting emergency and small business requirements. Decisions are often made within hours, and you may get the funds within 24-48 business hours.
You may get £500-£750,000 on short-term business loans in the UK. However, the direct lenders may offer limits of up to £1million, depending on your needs and loan affordability. Business owners can repay the loan within 12-60 months in fixed instalments. Interest rates remain competitive because of the short length. It means one pays more on the loan in total.
What are some types of short-term business loans to check?
Here are some types of short-term business finance options for small businesses in the UK to check:
- Unsecured business loans: Unsecured business loans do not require collateral. Instead, you may get a loan based on your company’s finances, business plan, revenue, cash flow, and good credit score.
- Invoice finance: You may get a loan against unpaid invoices. Generally, you may get up to 80% of the value of the invoice through invoice finance.
- Working capital loans: It is a short-term unsecured financial facility to cover every day operational costs, manage seasonal cash flow, and bridge cash flow gaps.
- Merchant Cash advance: Merchant cash advances are ideal if you receive sales mostly through credit cards. In this, the lender provides a percentage of the daily or weekly card and e-commerce sales.
- Same-day loans: You may get loans the same day for your business purposes that require fast cash. You may use same-day loans for emergency repairs and inventory updates.
How to calculate the total cost of a short-term business loan?
To calculate the total cost of a short-term business loan, calculate the total interest, loan fees, APR, and other charges. It will help you get the total amount repayable on the loan. Here is the simple formula to calculate the short-term loan repayment amount:
Use this basic calculation:
Total cost=Interest + Fees + Other charges
Then calculate:
Total repayable=Amount borrowed + Total cost
For example, if you borrow £10,000, pay £600 interest, and pay a £200 arrangement fee, your total cost is £800, and your total repayable is £10,800.
You can also use a free business loan calculator to reduce the hassle.
Step-by-step calculation of total cost of short-term business finance:
- Step 1- Write down the amount requirements
Analyse how much your business needs for a particular purpose, like releasing payrolls. Let’s say your business needs £8000 for 3 months.
- Step 2- Calculate the total interest
For a short-term loan, you may use a lender’s interest rate and repayment schedule. Alternatively, for an overdraft or credit line, calculate interest on the number of available days you expect to use the funds.
How can you calculate interest on a short-term business loan?
You can use the following formula to calculate interest on a short-term business loan:
Interest = Amount Borrowed × Annual rate × days used ÷ 365
For example, if you borrow 8000 at 20% interest rates for 90 days, your total interest cost for the loan will be:
£8,000×20%×90/365=£394.52
Therefore, the estimated interest you pay on a short-term business loan is £350.
- Step 3- Add set-up and loan arrangement fees
Include any loan application, arrangement fees, documentation charges, drawdown, or facility fee. Lenders may charge these fees upfront. It is generally deducted from the money you receive, or added to the total loan balance.
For example, if the arrangement fee is 2% of £8000, then you must pay £160 as set up and loan arrangement fees.
- Step 4- Add monthly renewal and unused limit charges
Yes, you may encounter such fees when you deal with a responsible direct lender for short-term business loans. You may need to pay annual loan renewal fees, commitment fees, or non-utilisation fees on the credit that you don’t use. These may turn out to be significant. This is especially true when the facility is for only a few months.
For example, if you must pay £15 for 3 months, you pay £45 as monthly renewal and unused loan limit fees.
- Consider the penalty charges
You must understand the additional penalties you may incur on a loan. You may consider early repayment charges, missed payments, late payment charges, etc. It will help you avoid confusion as to how the cost of a short-term business loan may rise.
Moreover, make sure that you get a clear loan agreement, especially if seeking short-term loans. Getting same-day business loans with transparent fees in the UK helps you plan repayments accordingly. You can set up direct debits for the loan payments according to the agreement. Transparency helps you decide quickly rather than wasting time calculating everything from scratch.
- Add every cost together
Lastly, you must add every cost from interest to APR and penalty charges. If you use the above example- your total cost of a short-term business loan will be £8600. Here is the breakdown :
| Item | Amount |
| Amount borrowed | £8,000 |
| Interest for 90 days | £395 |
| Arrangement fee | £160 |
| Monthly fees | £45 |
| Total cost | £600 |
| Total repayable | £8,600 |
Bottom line
Therefore, you can calculate the total cost of a short-term business loan by determining the interest charges, total loan fees, missed, late payments or early repayment charges and the annual/monthly cost of a loan. Choose the right short-term business finance solution. Add every cost together, and you will get the approximate amount of how much you will repay on a short-term business loan in the UK.
Harry Kane is a financial writer and author who has covered wide topics related to business loans and finance for the last decade. He has been working as the Chief Contributor in finding out deals on various business finance products covered by Thebusinessfunds, a reputed business loan broker firm in the UK. The primary work of Harry is to analyse the loan requirements of various businesses according to their circumstances and affordability. He directly communicates with the loan aspirants and guides them to get the right loan matching their needs. He has a vast experience in finance writing, working with many major business firms in the UK. At Thebusinessfunds, Harry also used to write well-researched blogs covering the financial problems of business loan aspirants and providing relevant solutions. He is a postgraduate with MSc. in Banking and Finance.
