The Real Cost of Borrowing Money

The final cost of borrowing money often involves much more than just the interest rate. A variety of other monetary and nonmonetary costs should be considered in determining the real cost of borrowing. For example, a loan that requires you to maintain certain financial ratios may be unrealistic for your particular business. Your checklist for reviewing the costs of a bank loan should include:

• direct financial costs, such as interest rates, points, penalties, and required account balances
• indirect costs and loan conditions, such as periodic financial reporting, maintenance of certain financial covenants, and subordination agreements
• personal guarantees needed to obtain the loan