The cost of a business loan depends on several factors: amount borrowed, loan term, interest rate applied, borrower's insurance premium, processing fees, additional fees… To help you see more clearly, here is an overview of the different indicators to consider when estimating the cost of your loan.
The nominal interest rate of the loan
The nominal rate is the rate used as the basis for calculating the interest on a loan or advance.
Each bank freely sets its own nominal rate, except for regulated or subsidized loans such as government-backed loans.
This rate generally corresponds to the market rate, that is, the rate at which the bank can itself borrow, plus a margin that takes into account numerous factors, including risk, workload, commercial policy, etc.
However, the nominal rate alone is insufficient to determine the cost of credit. In addition to interest, the cost of credit may also include processing fees, insurance premiums, costs related to certain guarantees, etc.
The only rate that incorporates all costs and allows for interbank comparison is the Annual Percentage Rate (APR).
The APR, Annual Percentage Rate
The APR (Annual Percentage Rate) is a rate calculated based on the characteristics of a loan, incorporating all cost elements: nominal interest rate, processing fees, insurance costs, etc.
If you choose insurance from a provider other than the bank's insurance, its cost will not be included in the APR.
However, if the bank granting you the loan also provides the group insurance policy, then the APR includes the insurance cost.
The APR makes it easier to compare the cost of a loan and, therefore, competing offers.
Note: this rate must be indicated in France, in all offers and loan agreements.
Credit application fees
When you submit a loan application, your bank will conduct a thorough analysis before providing you with a response. The review of your application may incur fees depending on the type of financing requested.
The application fee may be a fixed amount or a percentage of the loan amount granted.
Please factor this into your budget.
Although the analysis process is the same and just as thorough for both approved and rejected loans, banks generally do not charge application fees for rejected applications.
The cost of borrower's insurance
Borrower's insurance protects your heirs and/or ensures the continuity of your business and guarantees loan repayment to the bank.
Indeed, if you die or become totally disabled, the insurance will repay the loan in place of your heirs (in the event of death), your family (in the event of disability), or your business partners.
Depending on the bank and the insurer, insurance premiums are calculated differently:
based on the loan amount (for example, €3.50 per €10,000 borrowed),
or as an increase in the loan's interest rate, which is then applied to the outstanding balance (for example, +0.55%).
Other expenses
Some business loans require registration with the Commercial Court Registry.
Your bank will then pass on these fees, which generally do not exceed a few tens of euros.
This is particularly true for business loans secured by a pledge of business assets or a lien on the vehicle as collateral.
