Taking out a loan can be a trying effort for a small business. Many lenders know this and will look to take advantage of the process by sticking a borrower with hidden fees and upcharges that might not be obvious. This allows a lender to hike up the real APR that a borrower pays while highlighting a low headline cost that is not indicative of the real charges you will be paying. It is helpful to know some of the common fees that are discussed in an article on Business.com.
Origination Fees are a common charge that is added to the cost of a loan upfront. This would typically be in the 1-2% area of the value of the loan and is often deducted from the dispersion of the loan itself. If it is simply tacked on to the principal, please realize that you will also then be paying interest on the fee itself. Also note that the shorter the life of the loan, the larger the affect this fee will have on your real APR.
Underwriting Fees are much like Origination Fees in that they are charged upfront and are meant to defray the cost of doing business for a lender. During the application process, most lenders will run 3rd party reports, which do cost money, and they will have to allocate time and resources to the project. In theory an underwriting fee is fair if it is covering the cost of these extra expenses only but many lenders use this fee as a source of extra revenue. If a lender needs to charge you for their cost of doing business, they may not be the best fit for your company. A flat fee that covers extra costs to that lender for the underwriting process is reasonable. A lender also ought to be willing to share with you any information and reports that they run, especially if you are paying for them.
SBA Guarantee Fees are sometimes charged in the process of doing an SBA loan. These fees are either charged upfront or baked in to the APR that a lender charges you. Be sure to fully understand the rules around these fees as they are capped and a lender should not be making extra revenue from you for this.
Bounce Fees are charged for return payments and are typically flat fees that a bank will charge the lender if a check bounces or an electronic payment is returned for lack of funds. Careful planning and cash management will allow you to skip this issue and never run into this type of fee.
Prepayment Fees are fees that are charged for paying off a loan early. When making a loan, a lender will have a model that shows them how much they are set to make off of any loan that they give so by paying early, you are cutting in to the lenders profit. Prepayment Fees seek to offset some of this loss by adding an extra charge at the end of the loan if it does not run the course of the agreement. Prepayment fees can also be hidden in upfront costs where there is not technically a fee at the end, but any fees taken from you at the start of the loan are not reimbursed and so paying off early will not actually save you any money.
The important point here is to fully understand the structure of the loan that you are taking and to make sure that any costs associated with that loan are documented and calculated in to your cash flow needs. Surprises on a loan are extremely detrimental to a company’s bottom line.
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