Getting to grips with the costs of business loans
If you’re considering taking out a loan for your small business, then it’s essential to go into the process with your eyes open to the potential costs and fees involved with the process of applying for a loan. This knowledge can help ensure there are no nasty surprises around the corner – and that you’re covered financially for any fees that may apply.
Read on to find out more about the cost of small business loans and the fees involved in the process, with all the details you need to understand and make an informed decision about the choice for your business.
- How much does a business loan cost?
- Fees charged when you apply for business loans or finance
- Fees charged after you apply for business loans or finance
- Making headway of the fees and costs associated with business loans
How much does a business loan cost?
When it comes to choosing the right loan for a small business, most owners base their decision on the readily available interest rate or even the factor rate they are charged. Often, this decision process goes as far as looking at the number of years and the type of business loan but doesn’t go any further into the additional fees and costs incurred as part of the process.
Before you decide which loan is best for your business, take a look at the fees. This guide will give you a little more insight into the costs involved in applying for a loan, as well as the names each lender may use to describe the same cost. Here’s a rundown of the basics to get you started:
Fees charged when you apply for a small business loan
Before we get into the more specific types of fees and costs associated with applying and taking out a small business loan, the first thing to understand about business loan costs is the interest rate. These numbers are freely available before entering into an agreement, but following how each type of interest works is vital if you want to get the best deal for your money.
Fixed interest rate
A fixed interest rate is one that remains precisely the same for the complete term of your loan, allowing payments to stay at the same cost throughout the whole lending period.
Variable interest rate
A variable interest rate will fluctuate as time passes, resulting in both positive and negative changes to your repayments depending on the current rate.
A different way to calculate interest, factor rates are a decimal figure rather than a percentage. For example, if you took out a loan of £10,000, and the factor rate was 1.13, you’d pay back £11,300.
An alternative to an interest rate across the board, individual lenders may choose instead to apply a monthly fee to each invoice they send, which accounts for a percentage of the value on the invoice.
Fees charged after you apply for business loans or finance
Arrangement fees or booking/completion fees
An arrangement fee, also known as a booking or completion fee, is an administrative charge that
lenders apply to arrange credit. This fee is intended to cover any administrative costs connected to
setting up a new credit facility, and should always be fully disclosed with a written offer.
When do I pay? Payment of this fee is included either on the loan application or is added to the loan as part of the overall cost.
Who do I pay? This fee is paid directly to the lender for their administrative work.
Will I always have to pay this fee? No – this fee is at the lender’s discretion, and some services may not charge for their administrative part in the process.
Do I need to pay upfront or can I add it to my business loan? You can do either – lenders often specify which as part of your quote.
A broker fee is as the name suggests – it’s a fee paid directly to your broker, and is a charge to provide specialised services as well as execute transactions. Brokerage fees apply to many different types of loans or payments, but in this case, they apply to a small business loan as a flat fee of the loan amount to facilitate the borrower to secure the money they need.
How much? This cost is usually a 1-2% flat fee on your loan amount, between £0-£2,500
When do I pay? This fee can be added onto the loan or may be paid on the application of a loan, depending on the lender’s process.
Who do I pay? This fee is paid to your broker for their services
Will I always have to pay this fee? No – again, this depends upon the terms of your loan and the discretion of your lender.
Do I need to pay upfront or can I add it to my business loan? This fee could be either paid upfront or as part of an ongoing loan.
Bank/wire transfer fee
While bank transfer fees may seem like a product of a bygone age, some lenders do still require a payment to cover the immediate transfer of the money from their account to yours. This will likely depend upon whether they themselves are being charged for the transfer.
How much? This fee is usually between £10-£20.
Who do I pay? This fee is paid directly to your lender
Will I always have to pay this fee? Many banks no longer charge a transfer fee so these costs may not apply to your business loan.
Do I need to pay upfront or can I add it to my business loan? Your lender may choose either way to cover this cost, either asking for payment upfront or including it in your loan payments.
Origination or processing fee
This is a fee that is charged typically by the lender upon entering into a loan agreement. This cost is usually a fixed amount that covers their overall processing costs to complete and maintain your business loan over time.
How much? The percentage for this fee is typically between 0.5%-5% of the loan amount
Who do I pay? This fee is directly paid to your lender
Will I always have to pay this fee? No – this fee may vary according to your choice of lender, or may not even be included.
Do I need to pay upfront or can I add it to my business loan? Typically, this fee is added to the ongoing monthly cost of your loan until full payment.
Other loan fees
Beyond the typical costs associated with applying for a small business loan, other fees may apply in specific circumstances, that aren’t charged as standard. These fees often apply for missed or late payments, resulting in costs directly from the lender. Read on to find out more about the two most standard additional business loan fees:
Late payment fees
This is a fee charged by the lender should you miss a payment of a loan you’ve taken out. These fees will vary from lender to lender, and the amount will be detailed within the contract you sign on approval of the loan. These late fees act as a deterrent to ensure borrowers make their payments on time.
Returned payment fees
Though these fees are now less common with instant bank transfer, a returned payment fee is applied if the payment made by the borrower ‘bounces’ back, typically through the use of a cheque. This also applies or someone who makes a payment without funds available, which is more common when paying on credit card. Again, these fees act as a deterrent to ensure available money is paid towards the loan each month.
Making headway of the fees and costs associated with business loans
With so many variables involving in choosing the right small business loan for your purposes, having a clear understanding of the process – and costs involved – is a must. The above information will help you get on the right path, from understanding the upfront fees involved in borrowing to knowing whether an interest rate is correct for you.
With that information to hand, you can go into the process of applying for a loan with far more confidence and understanding – and much less chance of being blindsided by unexpected small business loan costs along the way. If you’re considering the best loan for you, contact us today to find out more about how we can help you get the lending you need to grow your business.
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