Loan Fees: What You Need To Understand For Your Small Business
Do you know all the fees associated with small business loans? No worries, not too many people can keep track of them all. It’s a vast and complicated world of jargon and hidden terms. Unfortunately, on top of interest and down payments, there are several other loan fees that could be included in certain small business loan packages, and we’re here to help you break them all down into easily-digestible parts.
Ongoing Administrative Loan Fees
These may be monthly. Ongoing administrative fees are other costs your lender might tack on to your loan for “servicing and maintaining” it. They might be a percentage or flat fee, but can really add up after a while. If you’re working with a reputable lender, you shouldn’t expect to pay these loan fees.
An application fee covers the costs of the actual application. Any costs to the lender for processing and accessing your application are passed to you through these loan fees, but this practice is pretty uncommon amongst lenders, so you’ll run into it less often than you will other fees.
Annual fees are often a flat rate added to your loan once a year. These loan fees are supposed to be for the service of maintaining your account, but this is not a common practice. Watch our for them, and chances are you’ll be able to find a lender that doesn’t charge them. If you can’t, though, it’s always a good idea to try and negotiate these loan fees, especially if you’re paying fees for other things.
Closing costs could be a name that encompasses many of the other loan fees mentioned in this list, so be on the lookout. They can include origination fees, processing fees, application fees or any other costs associated with packaging a loan. Closing costs are charged at loan closing – so, after you’re approved and are about to sign your loan documents, read carefully for these closing costs. Forbes advises lenders that, “When a lender mentions that you’ll have closing costs associated with your loan, you’ll want to know exactly what those closing costs are. That way, you can be sure that you’re being charged legitimate and fair fees.”
Collective and Overdue Fees
In addition to late payment fees, some lenders may charge collection and overdue fees if they have to actually take action to get payment from you.
Credit Check Fee
A credit check fee is exactly what it sounds like – a fee charged from lender to borrower for having to check their credit. Checking credit of potential borrowers requires the use of software that usually costs the lender a fee, so sometimes they’ll pass that to the applicant.
Guarantee fees are usually charged only for SBA loans. When you take out an SBA loan, you aren’t getting the funds from the SBA, you’re actually getting them from lenders themselves. The SBA guarantees 75% to 85% of the loan, meaning that if your business defaults on the loan, the SBA guarantees that the percentage of the loan to the lender. They alleviate the risk for the lender. Because they’re taking on this risk, they charge the lender a guarantee fee, which they’ll sometimes pass on to you. It’s usually included in your loan and is deducted from the loan before it’s disbursed to you.
The amount of these loan fees is determined by the term and loan amount and is based on the guaranteed portion, not the entire loan. For loans under $150,000, there’s no fee. For loans over $150,000 and terms of less than one year, the fee is 0.25%. For loans over $150,000 and terms over one year, the fees range from 3% to 3.75%.
Non-sufficient Funds Fee
If your account doesn’t have enough money in it, the lender will sometimes charge you a one-time fee for an unsuccessful payment. This is similar to an overdraft fee charged by banks.
Pretty obvious from the name, late fees are charged to the borrower when they’re late on their payment. These often range from $10 to $35 or can be around 2% to 5% of the outstanding balance.
These loan fees are pretty uncommon considering most payments are made online nowadays, but if you use a lender that requires payments via lockbox at a post office, they might charge you a fee for having that lockbox.
Done at loan closing, an origination fee is for evaluating and preparing the loan. Things like documents, notaries or attornies – these are all charges that can be carried over to the borrower via origination fees. Usually, they’re 0.5% of the loan amount.
Prepayment fees are possibly the most seemingly irrational loan fees charged by lenders. If the point of a loan is to pay it off, why are they charging you for doing it early? The rationale behind prepayment penalties is that if you pay off your loan early, it isn’t generating as much interest, and therefore isn’t making the lender as much money. The prepayment penalty ensures they get all the money they would if you kept the loan to term.
The good news, however, is that these loan fees are pretty uncommon with business loans (it’s more common for mortgages or car loans). Penalties are usually a percentage of the entire loan.
Many of the loan fees in this list could classify as service or processing fees, but it’s just another term to look out for. They’re used to cover the cost of customer service or other services the lender may provide – like paperwork or administration.
Unused Line Fee
The reason banks give out loans and lines of credit are to make money from them. If you have a line of credit from a bank and you’re not using it, then that’s not making the bank any money (typically, interest is only charged on the funds used from a line of credit). So, if you don’t spend over a certain amount of that credit line every month, the bank might charge you an unused line fee, which is often a percentage of the unused portion.
A wire fee happens when the lender is required to wire you the money via bank wire transfer, which is faster than the usual Automated Clearing House transfer. Since these are more expensive, however, that cost will sometimes be charged to you.
What to do?
No to be presumptuous, but it’s likely that lenders will try to take advantage of any knowledge you don’t have about loan fees, and you could end up paying way more than you intended. Make sure you look out for these loan fees in contracts or agreements with lenders. You’re allowed to ask questions and negotiate some terms, so don’t be scared to bring it up when you’re getting a small business loan.
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