Are You Overpaying on Your Business Loans?

Most business owners don't know what their loans are actually costing

Loans are sold by monthly payment. That's the number the salesperson leads with, the number in the headline, and usually the only number most business owners remember after signing. The actual cost — the total amount repaid, the effective annual rate, the comparison against what else is available — rarely gets discussed.

That's not an accident. Lenders know that £940 a month sounds more manageable than 22% APR or £67,000 in total repayments on a £50,000 loan. So they lead with the number that sounds most palatable, and hope you don't work out the rest.

Merchant cash advances are the worst offender. They don't quote an interest rate at all — they use a “factor rate” (e.g. 1.3), which sounds neutral but can translate to an effective APR of 60–100% once you account for how quickly the money is taken back. Most MCA borrowers have no idea what that number is.

UK SMEs typically pay 18–35% APR on unsecured business loans, based on LoanLens market monitoring. Many pay significantly more — particularly those who took on debt quickly during a cash crisis or who have MCAs running alongside term loans.

The four signs you're paying too much

1. You signed up during a cash crisis and haven't reviewed since

When you need money quickly, you take what you can get. Lenders know this — and some price accordingly. A loan arranged in a hurry, through a single provider, without time to compare options, is often an expensive loan. If you've been servicing it for a year or more without ever asking whether you'd get a better deal now, it may be worth finding out. The market changes. Your circumstances change. What was the best you could do in a tight spot two years ago might look very different today.

2. You have a merchant cash advance

MCAs are almost always the most expensive facility on your books. They're easy to get (no fixed monthly payment, repayments flex with your card turnover), which is exactly why they command such a high cost. If you have an MCA running, the first question to ask is whether you could refinance it into a term loan. In most cases, you can — and the saving is substantial. See the section below on MCAs specifically.

3. You have multiple loans from different lenders at different rates

Multiple loan payments mean multiple interest charges, multiple arrangement fees baked into the original cost, and no negotiating leverage with any individual lender. When you're one of thousands of customers, you're a number. When you're a single large loan with a clean repayment history, you have a bit more leverage. Consolidating multiple loans also lets you shop for a single rate across the whole debt — rather than being locked into whatever rate each facility was originally written at.

4. Your credit profile has improved since you took the loan out

Interest rates are priced on risk. When your business was newer, or had less trading history, or had been through a difficult period, lenders charged more because they were taking a bigger bet. If the business has stabilised, grown, or just demonstrated two more years of consistent repayment — you're a better credit risk than you were. That should mean a better rate. Most businesses never go back to test whether that's true.

What does “overpaying” actually mean in pounds?

Here's a worked example using figures typical of a mid-sized UK SME carrying mixed debt. These are estimates — your actual numbers will vary depending on rates, remaining terms, and settlement figures.

Now compare that to a single consolidation loan of £80,000 at 14% APR over 3 years:

That's roughly £4,900 a year staying in the business rather than going to lenders — on a fairly typical debt profile. The exact figures depend on your settlement amounts, any early repayment charges, and the rate you actually qualify for. You can run the numbers in our calculator with your actual figures.

Your options if you're overpaying

There are four realistic options. The right one depends on your debt profile, credit position, and how much flexibility your existing lenders allow.

Option 1: Consolidate into a single loan

One new loan pays off all your existing ones. You're left with a single monthly payment, a single lender, and (usually) a lower combined monthly cost — either because the rate is lower, the term is longer, or both. This works well when you have multiple expensive facilities and want to simplify and reduce your monthly outgoing at the same time. See our full guide to all four options when debt is piling up.

Option 2: Refinance individual loans one at a time

If you have one very expensive facility — most likely an MCA — it may be worth targeting that specifically rather than rolling everything into one new loan. This is particularly relevant if your other loans have early repayment charges that would make full consolidation expensive, or if your cheapest facility (e.g. a Bounce Back Loan at 2.5%) isn't worth disturbing. Tackle the most expensive debt first, leave the rest alone.

Option 3: Negotiate with your existing lender

This one is underused. If you have a clean repayment history with a lender, it may be worth calling them directly and asking whether they can reduce your rate, extend your term, or restructure your facility. Lenders would rather adjust terms for a good customer than lose them to a competitor. This won't work in every case, but it costs nothing to ask — and for businesses with strong relationships with their bank, it sometimes works surprisingly well.

Option 4: Do nothing, but understand the cost

Sometimes the maths doesn't stack up. If your existing loans have significant early repayment charges, or if the rate you'd qualify for on a new loan isn't meaningfully better, switching may cost more than staying put. That's a legitimate conclusion — but it should be a calculated decision, not a default. Knowing what your loans are costing and deciding to stay is very different from not knowing and assuming everything is fine.

Consolidation is not always the answer. But understanding the numbers always is.

What about merchant cash advances specifically?

MCAs deserve their own section because they work differently to every other type of business lending — and that difference makes them the most commonly misunderstood facility on a business's books.

Factor rates, not interest rates

An MCA doesn't charge interest. Instead, you receive a lump sum and agree to repay a larger lump sum — the factor rate determines by how much. A factor rate of 1.3 means you repay £1.30 for every £1.00 borrowed. On £50,000, that's £65,000 total repayment. This sounds simple, but because repayments are taken as a percentage of your daily or weekly card receipts, the effective APR can be very high once you factor in the speed of repayment. For a full breakdown, see our guide to what your MCA is actually costing you.

The cash flow impact

The daily or weekly deduction from card receipts hits differently to a fixed monthly payment. In a good week, a large chunk goes to the MCA. In a quiet week, slightly less — but it's always there, always draining. Many business owners find this more psychologically and operationally disruptive than a fixed direct debit, even if the headline cost looks similar.

Can MCAs be refinanced?

In most cases, yes. An MCA can typically be settled early (though some have early settlement clauses — check your agreement), and the outstanding amount can be consolidated into a term loan. For businesses with an MCA running alongside other debt, this is often the single highest-impact thing you can do. Replacing an effective 75% APR facility with a 14–20% term loan is a meaningful saving, even accounting for arrangement costs.

Is it worth switching? How to work it out

Before approaching any lender, it is worth doing this properly. Here's the sequence:

1. Get settlement figures from each lender. In the UK, lenders are required to provide a settlement figure on request. This is the amount needed to close the facility today — not the total remaining scheduled payments. Call each lender and ask for a settlement figure in writing.
2. Add up your total remaining payments on current loans. Settlement figure plus any early repayment charges gives you your true exit cost for each facility.
3. Compare against the cost of a consolidated loan. Use our business debt consolidation calculator to model what a new loan would cost — monthly and in total.
4. Factor in early repayment charges. These are often 1–3 months' interest on the outstanding balance. They can add up, particularly on larger term loans. Include them in your total cost comparison.
5. Not sure consolidation is right for your situation? Our 5-question decision tool gives you an honest assessment before you go further.

If the saving over the remaining term of your loans is larger than the cost of switching (ERC + arrangement fees), consolidation may be worth exploring further. If it's not, you've at least got a clear picture of where you stand.

Frequently asked questions