Quick answer
To compare business finance offers, add up every dollar you will pay across the time you actually hold the funding, including fees, then subtract what you receive. The result is the total cost in dollars. Divide by the months you use the money to compare offers of different lengths. Check early repayment, late fees and security costs too.
Key points
- Total dollars paid minus dollars received is the true cost of an offer.
- Compare over the time you will actually use the money, not the maximum term.
- Fees, early repayment terms and security costs belong in the total.
- Ask for the figures in writing, and read the contract.
Business finance is quoted in a bewildering variety of ways. One funder talks about a monthly figure, another about a fee per invoice, another about a flat sum added to the amount you borrow. Put three offers side by side and they can look entirely unlike each other. It’s tempting to pick the one with the smallest-looking number.
There is a better method, and it needs only arithmetic.
What is the total cost in dollars?
It’s the answer to one question: how many more dollars will I pay than I receive?
Total cost in dollars = everything you will pay (repayments, fees, charges) − everything you receive.
That’s it. No rate needs to be known or quoted. What matters is that you include everything and measure over the period you will realistically hold the funding.
What goes into “everything you will pay”?
Work through this list for each offer:
- Repayments, across the full period you’ll use the funding.
- Establishment or application fees.
- Account-keeping or facility fees, which may be monthly or annual.
- Fees on unused limits, if it is a line of credit.
- Legal, valuation and registration costs, especially for property-secured deals.
- Early repayment or exit fees.
- Security release or discharge fees.
- Late payment and default charges, which belong in your worst-case figure, not your expected one.
Then subtract what you receive. If a fee is deducted from the amount advanced, you receive less than the headline figure; use the amount that actually lands in your account.
How do you compare offers of different lengths?
Divide total cost by the number of months you’ll actually hold the money. That gives a cost per month of use, in dollars. It lets you compare a six-week invoice advance with a twelve-month loan fairly.
| Step | What to do |
|---|---|
| 1 | Write down the amount that actually reaches your account |
| 2 | Add all repayments and fees over the period you’ll hold it |
| 3 | Subtract step 1 from step 2: the total cost in dollars |
| 4 | Divide by months of use: dollars per month |
| 5 | Add a worst case: late fees, early exit, anything triggered |
Illustrative example only. Offer A advances $50,000 and requires repayments totalling $58,000 over twelve months, with a $1,000 set-up fee. Offer B advances $50,000 with a $500 fee and requires repayments of $56,500 over twelve months, but charges an exit fee of $1,500 if repaid early. If you will hold the money for the full twelve months, Offer A costs $9,000 and Offer B costs $7,000. If you expect to repay after five months and B’s exit fee applies on top of what you have already paid, the picture can change. The figures here are invented to show the method, not to suggest any real offer.
Why does time matter so much?
Because the same money costs different amounts depending on how long you use it. A short advance against an invoice may carry a small dollar cost because it is outstanding for weeks. A long loan carries a larger dollar cost because it is outstanding for years, even if each month’s cost looks modest.
The classic mismatch is borrowing long for a short need, and ending up paying for months of money you no longer use. The reverse mismatch is using a short, flexible product for a long need and paying repeatedly for the convenience.
How do different routes behave?
| Route | How cost tends to build | What to ask |
|---|---|---|
| Invoice finance | Fees accrue while invoices stay unpaid | What happens if customers pay late? |
| Cash-flow loan | Often priced for the full term | What is the early-repayment treatment? |
| Line of credit | Cost on drawn amounts, and possibly on the limit | What fees apply to unused limit? |
| Property-secured loan | Set-up, legal and valuation costs plus ongoing | What third-party costs apply? |
| Equipment finance | Ongoing plus any end-of-term payment | Is there a residual or balloon? |
What else belongs in the comparison?
Risk. A guarantee, or property security, has a cost even if it is never called on. The ASIC guidance for directors notes that a director may have to pay personally if the company cannot, so put a personal guarantee on the risk side of the ledger. Our page on director guarantees goes into it.
Flexibility. Can you pay down early, redraw, or change the schedule? Flexibility has value.
Tax. business.gov.au explains that leasing and buying differ in how you treat the asset, and that GST credits may be claimable on business vehicles if you are registered for GST. Ask your accountant how fees and structures affect your tax position.
Contract terms. ASIC explains that small business loans on standard form contracts can fall under unfair contract term protections, including late or default fees being assessed for unfairness. It’s still on you to read the contract and ask about anything one-sided.
What should you ask every funder?
- What is the total I will repay if I hold this for the planned period?
- Which fees apply, and when?
- What happens if I repay early?
- What happens if I pay late?
- What security or guarantees are required, and how are they released?
- Are there any end-of-term payments?
Get the answers in writing before you decide.
Can you work through one more example, with an invoice facility?
Yes, and it shows why time changes everything. Suppose an invoice for $20,000 is funded and the funder advances most of it immediately. Your customer pays on day 45, and the funder’s charges for that period total $450, with a fee of $150 for setting up the invoice. Total cost: $600 for 45 days, or roughly $400 per month of use. Now suppose the customer pays on day 90. The charges build with the extra time, so the cost might be nearer $1,050 in total, which is about $350 per month. The cost per month falls slightly while the total cost rises.
Illustrative example only. These figures are invented to show how the method works. Real facilities have different fee structures, and you should ask each funder for its own schedule in writing.
The takeaway is not the numbers but the shape: slower payment raises the total, and you want to know by how much before you commit.
How should you handle uncertainty in the comparison?
Run three scenarios for each offer: best case, expected case and worst case. In the best case you repay as planned. In the expected case, something is slightly late or slower. In the worst case, you hit a late fee, an extension or an early exit charge. Offers that look close in the best case often separate in the worst, and the worst-case figure is the one that tells you how much risk you are taking on.
Also note what the contract says about changes. Can fees rise during the term? Can the limit be reduced? Can the funder vary terms with notice? A cheaper offer that can change under you may be riskier than a slightly dearer fixed one.
What if the numbers are too close to call?
Then choose on fit. Prefer the structure that matches the purpose, gives you more flexibility, puts less personal or property security at risk and comes from a funder who explains things clearly. When costs are within a few hundred dollars, those qualities are worth more than the difference. And if you are still unsure, ask someone independent, such as your accountant, to look at the offers with you before you sign.
What is the common mistake?
Choosing on the weekly or monthly amount. A smaller instalment often means a longer term and a larger total. Choosing on the total alone is not right either: a lower-dollar offer that doesn’t fit your cash flow or puts a home at risk may be the costlier option in practice. The aim is the lowest total cost for a structure you can safely carry.
What next?
If you have offers in hand, run them through the five steps. If you do not, tell us what you need and a real person will help you work out which routes are worth pricing. Enquiring takes about a minute, involves no credit check, and doesn’t send your details to a pile of lenders. Accurate answers on amount, timing and what you hold are what let us match you properly the first time. See if you qualify.
Frequently asked questions
Why not just compare rates?
Different products quote costs in different ways: per period, per invoice, as a fixed fee or as a factor. Converting them into dollars paid over your actual use makes them comparable.
Should I include GST in the comparison?
If you are registered for GST and can claim credits on the fees, the net cost may be lower. Your accountant can confirm treatment for your situation.
What if I repay early?
Some offers reduce the cost if you repay early; others price the full term in regardless. Ask what you would pay if you cleared the facility after three months.
Do guarantees and security have a cost?
Directly, there may be legal and registration costs. Indirectly, they carry risk to personal or business assets, which is a cost even if it never crystallises.
What is a fair question to ask a funder?
Ask for the total amount you will repay, every fee and when each applies, what happens if you repay early or pay late, and what security or guarantees are required.