If you think the only cost you would pay for getting a business loan is the stated interest rate think again. Open your eyes and read the fine print, there are a variety of costs and fees (some hidden) that are associated with business loans or any type of borrowing for that matter.
These fees are charged by banks and other financial institutions to cover their costs of lending and so they can make a profit.
Just so the term is clear, a loan fee is any charge associated with a business loan – or any type of borrowing – that does not include the interest rate.
While some of these loan fees may vary per lender and business loan type, there are a few that are common.
Here are four business loan fees you should know of before applying for a loan:
This is the fee that a lender may charge when a business applies for a loan. These fees are usually charged before your loan is approved and are not refundable when your loan application is denied. Today, such fees are gradually fading off, but a few lenders still charge borrowers these fees. An application fee is usually charged as a flat sum.
Processing or Service Fee
This is a very common fee that is charged by both banks and online lenders. It is an amount paid to the lender to cover a variety of services while processing a business loan. It covers activities like documentation, credit checks, customer service, loan management and collateral valuation etc. They can be charged monthly for the duration of the loan repayment or as a one-time fee.
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Late Payment Fee
If you’re don’t pay your business loan on time as specified by your loan agreement, lenders would charge you an amount for late payment. Depending on the lender, this fee can be a flat sum or a percentage of the missed payment.
Sometimes when your loan is disbursed, you would find that a certain amount has been deducted for insurance. This charge is meant to provide coverage that may help you pay off your loan or make your loan or credit card payments in the event of income/job loss, critical illness, accident or death.
This charge is usually added at the point of loan approval and is sometimes hidden until the loan is disbursed. The insurance charge is about two per cent of the loan amount.
I hope that with this knowledge you will be aware of the real costs associated with borrowing for your business and make adequate plans for them.