The cost-plus method used in debt finance and generally the finance is associated with an asset. The financier would purchase the asset on behalf of SME and then would simply add a mark up to the purchase price and then allow the SME to pay that asset off over a specified term.
Take for example, by using the sliders below select the ‘how much’ slider to R10,000 then select the ‘which rate’ slider to 5% and lastly the ‘how long’ slider to 10 months. The cost-plus calculator will show you that the total interest is R500, this is calculated by taking the amount of the asset by multiplying by the rate of 5%. If you change the ‘how long’ slider to any other term you will notice that the total of R500 stays the same. The deal you strike with the lender is upfront and based on the asset not the term.
Term only plays a part when decide on what the monthly instalment will be. And the formula to calculate the instalment is to add the interest to the asset price and then divide that by the term desired. In our case (10,000 + 500) / 10 which equals the instalment of R1050.
Continue to play with the sliders to give yourself a better learning experience.