- Jurisdiction
- General — products vary by country
Executive summary
Every financing source has a cost — explicit (interest, fees) or implicit (ownership, control, covenants). Matching the financing to the purpose and duration of the need is the central principle. This note compares common sources and explains how to think about the all-in cost of a loan.
Key findings
- 1Match the term of financing to the life of the asset or need being financed.
- 2The all-in cost of a loan includes fees, not just the stated rate.
- 3Equity has no required payment but is usually the most expensive capital over time.
Common sources
| Source | Typical use | Key trade-off |
|---|---|---|
| Line of credit | Working capital, seasonality | Variable rate; may be callable |
| Term loan | Expansion, acquisitions | Fixed repayment schedule, covenants |
| Equipment finance | Machinery, vehicles | Secured by the asset |
| Equity | Growth with uncertain cash flows | Dilution and shared control |
All-in cost
Include origination fees, closing costs and any required deposits when comparing offers. Two loans with the same stated rate can have different effective costs.
The matching principle
Short-term needs (inventory, receivables) are best funded with short-term, flexible facilities. Long-lived assets are best funded with longer-term financing whose repayment matches the cash the asset generates.
Investment considerations
Request offers in writing and compare annualised all-in cost and covenants side by side.
Risks and limitations
Variable-rate debt exposes the business to rising rates; personal guarantees may put personal assets at risk.
Methodology
Conceptual comparison; no lender rates or terms are quoted.
Facts, assumptions, estimates and opinions
TIC labels the nature of each material claim so you can weigh it appropriately.
- Verified factLines of credit commonly carry variable interest rates.
- OpinionMatching financing duration to asset life is the most important financing discipline.
Sources and references
- 01Fund your business — U.S. Small Business Administration
Downloads
A downloadable PDF edition of this research has not been published yet.
