UK Business Loan Costs: APR, Fees and Prepayment
Understanding the true cost of a UK business loan means looking beyond the headline interest rate. APR, arrangement fees, and early repayment charges all affect what you actually pay. This guide explains each cost component, how lenders present them, and what to check before you sign.
Why the headline rate is not the whole story
The interest rate quoted in a business loan offer is only one part of the total cost. Lenders may also charge arrangement fees, broker fees, administration fees, and in some cases a drawdown fee on each tranche you take. Each of these adds to the effective cost of borrowing.
A lender advertising 7% per annum may cost more in practice than one advertising 9%, once fees are factored in. The only reliable way to compare offers is to calculate the total amount repayable or, where it is disclosed, use the Annual Percentage Rate. Always ask lenders to confirm the full list of charges in writing before proceeding.
What APR actually measures on a business loan
APR, or Annual Percentage Rate, expresses the yearly cost of a loan as a single percentage figure, incorporating interest and mandatory fees. For most business loans, lenders are required under the Consumer Credit Act 1974 or voluntary FCA guidance to disclose an APR where the product falls within scope.
However, many commercial loans to limited companies fall outside consumer credit rules, so APR disclosure is not always mandatory. In those cases, lenders may quote a simple annual interest rate without including fees. If APR is not shown, ask the lender to provide the total cost of credit figure, which is the sum of all interest and charges payable over the full term. This single number allows a clean comparison across different products.
Arrangement fees: how they are structured
Arrangement fees are charged by the lender for setting up the loan and are typically between 1% and 3% of the facility amount. They are the most common upfront cost on UK business term loans and are sometimes added to the loan balance rather than paid on day one.
When an arrangement fee is added to the loan, you pay interest on it for the full term. On a £200,000 loan with a 2% arrangement fee added to the balance, you are effectively borrowing £204,000 from day one. Over a five-year term at 8%, the fee itself generates additional interest of roughly £1,600. Always clarify whether the fee is deducted from the advance or added to it, and how that affects your net day-one receipt.
Other fees to check in the loan documentation
Beyond arrangement fees, several other charges commonly appear in business loan agreements and can meaningfully increase your total cost. Being aware of them in advance allows you to negotiate or account for them in your cash flow planning.
Valuation fees apply where a lender requires a professional valuation of property or assets offered as security. Legal fees may be charged where the lender appoints solicitors to register a charge at Companies House or HM Land Registry. Monitoring fees appear on some asset-based facilities and revolving credit lines. Draw-down fees apply on some development finance and structured facilities each time funds are released. Exit fees, separate from early repayment charges, are levied by some lenders at the end of the term as a percentage of the original loan. Checking the schedule of charges section in the loan offer will list all of these.
Early repayment charges explained
An early repayment charge, sometimes called an ERC or prepayment penalty, is a fee payable if you repay the loan ahead of schedule. It compensates the lender for interest income they lose when a borrower exits early. ERCs are common on fixed-rate term loans and less common on variable-rate products.
ERCs are typically structured in one of three ways. A flat percentage of the outstanding balance applies regardless of when you repay. A reducing schedule starts high in year one and falls each year, often reaching zero in the final year. A break cost calculation uses the difference between your contracted rate and current market rates to estimate the lender's actual loss. For fixed-rate loans priced when the Bank of England base rate was higher, a rate fall can make break costs significant. If you expect to refinance or sell the business within the loan term, negotiate the ERC structure before signing.
How to compare two loan offers side by side
The most reliable way to compare two business loan offers is to build a simple total cost comparison using four figures: the loan amount, the total interest payable, all mandatory fees, and the total amount repayable. This removes the distortion caused by different fee structures and quoting conventions.
Request a full payment schedule from each lender. This will show each monthly payment, the interest and capital split, and any fees charged during the term. Sum the payment column, subtract the loan amount, and the remainder is your total cost of borrowing. Where one lender quotes a flat rate and another quotes a reducing balance rate, be especially careful. A 10% flat rate on a term loan is materially more expensive than a 10% reducing balance rate, because flat rate interest is calculated on the original balance throughout rather than on the declining outstanding amount.
Practical steps before accepting a loan offer
Before accepting any business loan offer, a short checklist of cost-related checks will help you avoid unexpected charges and ensure the facility fits your financial plan.
Confirm the total amount repayable in writing. Check whether the arrangement fee is deducted from the advance or added to the balance. Ask for the full schedule of charges and read the default interest clause, which sets the rate applied to missed payments. Review the ERC schedule and model the cost of early exit at year one, year two, and year three. If the loan is secured, establish who pays valuation and legal fees and whether those costs are capped. Finally, check whether there is a fee for any permitted overpayments, as some lenders allow partial overpayments without triggering the full ERC, while others do not.
| Cost type | Typical range | When charged | Added to loan? |
|---|---|---|---|
| Arrangement fee | 1% to 3% of facility | At drawdown | Sometimes |
| Broker fee | 1% to 2% of facility | At drawdown | Rarely |
| Valuation fee | £500 to £3,000+ | Before offer | No |
| Legal fee (lender) | £750 to £2,500 | At completion | Sometimes |
| Early repayment charge | 1% to 5% of outstanding balance | On early exit | N/A |
| Exit fee | 0.5% to 2% of original loan | End of term | N/A |
| Default interest | 2% to 5% above contract rate | On missed payment | N/A |
Step-by-step
- Request the total amount repayable and a full payment schedule from each lender.
- Identify whether the arrangement fee is deducted from proceeds or added to the loan balance.
- Obtain the full schedule of charges and note any valuation, legal, or monitoring fees.
- Review the ERC schedule and calculate your exit cost at year one, two, and three of the term.
- Check the default interest rate and the conditions under which it is triggered.
- Compare offers using total cost of credit rather than headline rate alone, then confirm all terms in the formal loan agreement before signing.
Example
A manufacturing company borrowed £150,000 over four years. Lender A quoted 8.5% with a 1% arrangement fee deducted from proceeds. Lender B quoted 7.9% with a 2.5% arrangement fee added to the balance and a flat-rate ERC of 3% in years one and two. Using total amount repayable, Lender A cost £27,400 in total charges. Lender B cost £31,200. The lower headline rate from Lender B was more expensive overall.
Frequently asked questions
Is APR always disclosed on UK business loans?
Not always. APR disclosure is required where a loan falls within the scope of the Consumer Credit Act 1974, which generally covers loans to sole traders and some small partnerships below certain thresholds. Loans to limited companies are often exempt, so lenders may only quote a simple annual rate. Where APR is not shown, ask for the total cost of credit figure instead.
Can I negotiate the arrangement fee?
Yes, in many cases. Arrangement fees are not fixed and lenders will often reduce them for stronger credit profiles, larger loan amounts, or returning customers. Brokers with volume relationships with a lender may also secure reduced fees. Ask the question directly and get any reduction confirmed in the formal offer document before proceeding.
What is the difference between a flat rate and a reducing balance rate?
A flat rate calculates interest on the original loan amount for every year of the term, regardless of how much you have repaid. A reducing balance rate calculates interest only on the outstanding balance at each payment date. A flat rate of 10% is roughly equivalent to a reducing balance rate of around 18% to 19%, depending on the term. Always confirm which method a lender is using when comparing quotes.
What happens if I miss a payment?
Most loan agreements apply a default interest rate to overdue amounts, typically 2% to 5% above the contract rate. Some lenders also charge a late payment administration fee. Persistent missed payments can trigger a demand for immediate repayment of the full outstanding balance and may lead the lender to enforce any security or personal guarantee in place. Contact your lender promptly if you anticipate difficulty meeting a payment.
Are early repayment charges negotiable?
They can be, particularly for larger loans or borrowers with strong profiles. Some lenders will accept a reducing ERC schedule rather than a flat percentage, or agree to waive the ERC entirely if the loan is refinanced with the same institution. Negotiate ERC terms before accepting the offer. Once the agreement is signed, the schedule is contractually binding.
By Oliver Mackman, Director, Best Business Loans Ltd. Last reviewed 2026-06-10.