Hidden borrowing costs cloud SME finance

SMEs are being warned to look past headline borrowing rates as volatility linked to Middle East tensions feeds expectations that financing costs could stay elevated. Ebury, the global financial services company, says the real cost of finance is often shaped by fees, repayment restrictions, and foreign exchange constraints that sit outside the headline price.

The warning is aimed particularly at internationally active smaller businesses, where the economics of a facility can change materially once real usage patterns are taken into account. According to Ebury, borrowing costs are determined not only by the stated interest rate, but by how capital is accessed, how often it is used, and what happens when requirements shift mid-term. Finance leaders may be comfortable comparing base rates and fees, but the contingent costs attached to real-world usage are often less visible at the outset.

That matters because several common charges can erode the apparent advantage of a facility before a business has fully deployed the capital. Non-utilisation fees on committed lines can reduce the value of undrawn liquidity. Early repayment charges and make-whole clauses can penalise businesses for repaying ahead of schedule. Legal, documentation, and amendment fees can also accumulate over time, even where underlying credit use is limited.

For companies trading across borders, the picture becomes more complicated. Borrowing in one currency while paying suppliers in another introduces foreign exchange exposure that can outweigh the interest charge itself. Ebury argues that where lenders restrict currency flexibility, the structure of a facility can begin to influence day-to-day operating decisions. In that context, the ability to draw, repay, and settle in multiple currencies becomes as important as price.

The company illustrated the issue with a comparison between two hypothetical £100,000 facilities over six months. One is priced at 1% a month, producing £6,000 of interest. The other is priced at 4% over six months with a 2% structuring fee. While both appear to cost £6,000 in cash terms, the upfront fee means only £98,000 is actually deployed under the second option, pushing the effective annualised cost above the headline figure. In Ebury’s example, the second facility’s effective annualised cost rises to about 12.24%, despite a lower-looking headline rate.

Charles Hardaker, Global Head of Lending at Ebury, said: “Ultimately, the true cost of borrowing is defined not by the headline rate, but by how capital behaves in practice. Fees on unused liquidity, penalties on early repayment, and currency constraints all shape real financing outcomes.

“For internationally active SMEs, flexibility and transparency matter as much as price. In a period of geopolitical uncertainty driving rate volatility, businesses cannot rely on headline pricing as a true guide to affordability.

“Finance leaders should be scrutinising total cost under real usage scenarios, not theoretical ones, and ensuring their funding structures remain resilient in volatile markets.”

The argument is a practical one for finance leaders facing a more volatile rate environment. Rather than comparing facilities on headline pricing alone, Ebury is urging businesses to test how borrowing costs behave under real scenarios, including short-term drawdowns, early repayment, and changing currency needs. In a market where funding structures can quickly affect cash efficiency, the detail of a facility may prove as important as the rate attached to it.