Expert opinion

Why you should never choose funding based on the headline interest rate

Jim Shaw, CEO & Founder at Shaw & Co, explains why business leaders should not choose funding based on the headline interest rate.

2 minutes
January 31, 2022
Jim Shaw
Alex Motoc on Unsplash

High street lenders are typically able to offer low interest rates as their funding costs are substantially lower than those of the alternative lenders.  

What's the catch?

However, there are catches. For example, when it comes to risk appetite the high street lenders can be notoriously conservative, baulking at long-term lending to any business without tangible assets.

This usually results in any SME taking an unsecured loan having to pay back the amount back very rapidly – usually three or four short years or as soon as cashflow permits. Consequently, this does not leave much room for cashflow deviations or retention of surplus cash to invest elsewhere within the business. In extreme cases the loans being offered in these circumstances can simply be unaffordable in terms of the overall debt service cost, even though the headline interest rate is very low.

An alternative option?

In this context we often see clients opting for alternative funding options where the headline interest rate can be two or three times the high street equivalent, but where the loan profile stretches beyond five years and with substantial capital repayment holidays – in some cases as generous as a full bullet payment at maturity. This not only allows a client to potentially borrow more for growth projects which can deliver a return on investment far greater that the carrying cost of the loan, it also ensures the loan is entirely affordable and does not put undue stress on the bank balance.

When seeking a loan facility it is therefore vital that SMEs consider all aspects of the loan and not just that headline interest rate – the duration, any restrictions on what the loan can be used for, whether any capital holidays are available, what security will be required, any early repayment penalties, and numerous other conditions that often go unnoticed.

Jim Shaw – CEO & Founder at Shaw & Co
Jim Shaw – CEO & Founder at Shaw & Co
We work with growing businesses that have funding needs in excess of £2m and regularly approaching £100m. Our clients’ needs will typically be for sophisticated finance products such as cash flow based lending or private equity investments. Our value lies in helping clients access funding that relies on confidence in future trading and cash flows. For a confidential, independent, no obligation discussion on the funding options available click the 'Let's chat' button.
Jim Shaw
Founder & CEO
Jim Shaw
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