How to Read a UK Business Loan Offer

APR: What It Tells You and What It Does Not

Annual Percentage Rate (APR) is a standardised figure that expresses the yearly cost of a loan including interest and mandatory fees, making it the most useful single number for comparing two offers side by side. It is calculated using a standard FCA formula set out in the Consumer Credit Act 1974, which still applies to many SME loan products.

APR has real limits, however. It assumes you hold the loan for its full contractual term, which means it can flatter short-term products and misrepresent revolving facilities where your balance changes monthly. For fixed-term loans under 12 months, a simple total cost of credit figure is often more informative than APR alone. Always check whether the APR quoted is representative or the specific rate offered to your business after underwriting.

Interest Rate Type: Fixed, Variable, and Factor Rate

The interest rate structure determines how your repayment amount may change over the life of the loan, and confusing the three main types is one of the most common errors SME directors make when reviewing an offer.

A fixed rate locks your interest cost for the entire term, giving payment certainty regardless of movements in the Bank of England base rate, currently 3.75 per cent. A variable rate is typically expressed as base rate plus a margin, so your monthly payment will shift if the BoE moves. A factor rate, common in merchant cash advances and some fintech term loans, is expressed as a decimal multiplier such as 1.28. Multiply your loan amount by the factor to get total repayment; there is no APR equivalent, so the FCA does not require lenders to quote one. If you see a factor rate, convert it manually before comparing it to any APR-quoted product.

Fee Structures: Arrangement, Administration, and Draw-Down Fees

Fees outside the interest rate can add materially to the total cost of a loan, and lenders are not always required to include every fee within the quoted APR for commercial lending above certain thresholds.

Arrangement fees are charged for setting up the facility; they typically range from 1 per cent to 3 per cent of the loan value and are sometimes deducted from the advance rather than paid separately, which means you receive less capital than the headline figure suggests. Administration or management fees may recur monthly or annually and cover account servicing. Draw-down fees apply when you access tranches of a revolving or staged facility. Ask the lender to provide a full schedule of all fees in writing before acceptance; the FCA's pre-contractual disclosure rules for regulated agreements require this, and most commercial lenders follow the same practice voluntarily.

Total Cost of Credit: The Number That Matters Most

Total cost of credit (TCC) is the single figure that represents everything you will pay above the amount borrowed, expressed in pounds, and it is the clearest basis for comparing two loan offers with different structures.

To calculate TCC, add all scheduled interest payments, all mandatory fees, and any compulsory insurance premiums across the full loan term. Subtract the net amount you actually receive (after any upfront fee deductions) from the total you repay, and the difference is your TCC. Reputable lenders will provide this figure in their offer documentation. If a lender's offer letter does not state TCC clearly, ask for it in writing before proceeding. A lower APR does not always mean a lower TCC, particularly when arrangement fees are high or the term is short.

Prepayment Penalties and Early Repayment Charges

A prepayment penalty, also called an early repayment charge (ERC), is a fee triggered when you repay all or part of a loan ahead of the agreed schedule, and it is often buried in the terms and conditions rather than highlighted in the headline offer.

ERCs are calculated in different ways by different lenders. Some charge a flat percentage of the outstanding balance, typically between 1 per cent and 6 per cent. Others use a remaining-interest method, where you owe a proportion of the interest that would have accrued to the end of the term. Fixed-rate loans are more likely to carry ERCs than variable-rate products because the lender has hedged the rate. If you anticipate refinancing, selling the business, or repaying early from a cash windfall, negotiate the ERC clause before signing, or ask whether a break-fee cap can be inserted. Some lenders, particularly challenger banks, offer ERC-free terms on shorter products as a competitive differentiator.

Conditions Precedent and Ongoing Covenants

Conditions precedent are requirements you must satisfy before a lender will release funds, and ongoing covenants are obligations you must maintain throughout the loan term; both can trigger a default if not met, even if you are repaying on time.

Common conditions precedent include providing audited accounts, a signed personal guarantee, evidence of business insurance, or a solicitor's certificate on a secured charge. Ongoing covenants in larger facilities may restrict your ability to take on additional debt, pay dividends above a set level, or dispose of significant assets without lender consent. Review every covenant carefully. Financial covenants such as a minimum interest cover ratio or maximum loan-to-turnover limit can become binding constraints on business decisions for the duration of the loan. If any covenant appears unworkable given your business plan, raise it with the lender during the offer negotiation stage, not after drawdown.

Checklist Before You Sign

Before accepting any loan offer, a short structured review of the key terms reduces the risk of unexpected costs and contractual surprises later in the loan term.

Work through the offer letter and facility agreement with the following questions: Is the APR specific to your application or a representative rate? What is the total cost of credit in pounds? Are all fees listed in a single schedule, and are any deducted from the advance? Is the rate fixed or variable, and if variable, what is the margin over base? What is the ERC structure and can it be capped or removed? What conditions precedent must you satisfy before drawdown, and can you meet them within the timeframe given? What ongoing covenants apply, and do any conflict with your current or planned business activities? If you are uncertain about any clause, a commercial solicitor or independent finance broker can review the documentation before you commit.

Step-by-step

1. Locate the APR and confirm whether it is the specific rate offered to your business or a representative rate based on a sample of applicants.
2. Identify the interest rate type: fixed, variable over base rate, or factor rate. If a factor rate is used, multiply the loan amount by the factor to calculate total repayment.
3. Request a complete fee schedule from the lender and check whether any fees are deducted from the advance rather than paid separately.
4. Calculate or confirm the total cost of credit in pounds by adding all interest and fees across the full term, then subtract the net amount you receive.
5. Read the early repayment charge clause in full. Note whether it is a flat percentage or a remaining-interest calculation, and negotiate a cap if early repayment is plausible.
6. Review all conditions precedent and ongoing covenants. Flag any that conflict with your business plan and raise them with the lender before acceptance.
7. If any element is unclear, obtain written clarification from the lender or seek independent review from a commercial solicitor or FCA-authorised broker before signing.

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Frequently asked questions

By Oliver Mackman, Director, Best Business Loans Ltd. Last reviewed 2026-05-23.