What Fees and Charges Should Small Business Owners Be Aware of In Terms
Accessing financing is often a necessary reality for entrepreneurs looking to start or grow a small business.
Whether taking out a small business loan, line of credit, merchant cash advance, or other capital option, owners must navigate a sea of fees, interest rates, and fine print clauses that drastically impact costs.
This guide will examine the most common fees and ongoing costs associated with small business loans and other financing vehicles.
1. Origination & Application Fees
The first charges that small business owners will likely encounter when seeking financing are origination and application fees. These upfront costs cover a lender’s expenses for processing, reviewing, and approving funding requests.
Origination fees are usually specified as a percentage of the total borrowed loan amount. Typical origination fees range from 0.5 % to 1% of principal, depending on the lender, product type, and applicant’s creditworthiness.
Meanwhile, application fees are fixed dollar amounts, such as $50 or $500 added during submission.
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With some term loans, lines of credit, and non-bank financing vehicles, these charges may be negotiable – especially for repeat borrowers with established relationships. Savvy entrepreneurs will inquire: “Are these fees flexible or waivable?” It can’t hurt to ask!
2. Administration & Underwriting Charges
Closely related to origination, administration fees cover a lender’s costs for account maintenance, payment processing, mailings, and other operating expenses tied to managing loans after funding. These recurring fees are generally priced as flat monthly charges of around $10 to $30 per active loan.
Underwriting charges represent one-time, upfront fees levied to perform detailed credit checks, evaluate risk, and make final application approval decisions. With large SBA loans, underwriting fees often scale from 0.5% to 2% of the approved borrowing amount.
Both fee categories fall within typical business lending practices, albeit with wide cost variance between basic loans versus more specialized products. Savvy borrowers should validate if the levels being quoted are competitive. Ask other small business owners for data points.
3. Prepayment Penalties
One of the most onerous charges that cash-strapped small business owners face is prepayment penalties – fees incurred for paying loans off early. These debilitating sums, sometimes 2% to 10% of the remaining principal, can deter entrepreneurs from refinancing high-interest debt or seizing growth opportunities requiring extra capital that could be attained by paying off existing obligations.
Unfortunately, prepayment penalties remain common, especially with merchant cash advances and certain bank loans. Comb through the particulars of any financing agreement to spot such clauses. Then, negotiate exemptions based on intended business plans or choose alternative lenders avoiding these risky fees altogether.
4. Late Payment Charges
Falling behind on loan payments spells trouble for small business borrowers in more ways than one. Not only does tardiness signal operating strains worrisome to lenders, but late fees can rapidly multiply operating losses.
Many lenders levy 5% to 10% of the missed payment’s value or fixed fees of up to $39 per incident. Beyond 90 days overdue, default can trigger loan acceleration, Principal payoff demands, and even legal action. Entrepreneurs must budget carefully and continuously to meet repayment schedules, even lining up cash reserves if needed to avoid damaging late penalties.
5. Loan Guarantee & Collateral Requirements
Loans backed by collateral such as valued business assets or owners’ guarantees are deemed less risky, meriting lower interest rates. However, guaranteed loans frequently come with fees like property appraisal costs, legal document expenses, and monthly guarantee fees.
Utilize guaranteed funding strategically after weighing fees against rate savings. And beware of prepayment traps: personal guarantee clauses often persist for the full duration of long-term loans – meaning early payoffs won’t release business owners’ assets/equities pledged as collateral.
Scrutinize terms vigilantly to avoid guarantee commitment risks.
6. Credit Insurance Requirements
Many small business financing products, especially high-risk loans, tie mandatory credit insurance to their terms. This passes risk mitigation costs directly onto borrowers. Required monthly policy premiums based on loan balances can become quite costly.
When comparing financing options, weigh if proposals with higher rates yet no credit insurance come out cheaper long term versus lower rate but insurance-tied offers that seem attractive upfront. Factor both rates and attached insurance costs into total pricing projections before deciding.
7. Loan Broker & Referral Fees
Working with a loan broker or getting referred by a third party to secure financing can simplify and accelerate the capital raising process through their existing lending relationships. However, convenience comes at a price.
Based on loan amounts, broker and referral fees are typically structured on a sliding scale. Smaller loans may incur 2% to 5% charges while larger financing can see up to 1% referral costs. With some brokers charging both entrepreneurs and lenders, borrowers inevitably absorb expenses whether indirectly through higher rates or directly via invoices.
Ask upfront: can broker fees be waived? If not, compare their structural lower capital costs against other direct options without intermediaries. Remove brokers introducing exorbitant lenders.
Conclusion
For savvy small business owners, understanding the full spectrum of potential fees and ongoing costs associated with financing is as essential as evaluating interest rates before committing to loan products.
Modeling total pricing requires scrutinizing all terms. Consider all the terms mentioned above before agreeing on any loan.
