When a business seeks external finance, such as a commercial loan, the aim is often to plug a funding gap or cover upcoming expenses (such as those associated with growth).
Although the goal is to obtain money to use in your operations, you often need to pay to take out external funding. This is because any loan you pursue will require work by your lender and other parties, who need to be paid for their effort.
The fees associated with any loan can contribute to the overall cost to your business. As such, you need to take these fees into account when considering your affordability. This will ensure you can keep up with the repayments and that any funding you acquire does not put you in a worse position.
Understanding the costs associated with individual loans can also serve as a point of comparison when shopping around in the market, helping you to determine the best deal for your needs.
Below, we have explored the standard fees you may need to pay when committing to a commercial loan and what each means.
Deposit
One of the most frequently asked questions about a business loan is whether a deposit is needed to secure the funds. It will certainly be requested if you are seeking a commercial mortgage or asset finance, but generally not for other types of loans.
A loan deposit is used to reduce the risk posed to the lender and prove your business solvency by your ability to put together the deposit. The deposit will typically come in the form of cash or assets which can be used as collateral.
The specific amount you will need to raise for a deposit will vary depending on the type and size of the loan you are getting, as well as the lender’s criteria. It tends to fall between 20 and 35% of the loan’s total value.
While you need to pay the deposit upfront, it isn’t an ‘additional’ fee. The deposit amount will come off the total amount you owe to the lender, which should lower your repayments.
However, you must raise the amount required before any funds will be released to you, which may be a barrier for some businesses.
In the case of refinancing of assets, no such deposit is required.
Interest
Most people will know that you will be charged interest on top of the capital repayments. This increases the total amount you will pay back.
It’s impossible to avoid interest when taking out a loan, but it is possible to identify the most competitive rates, keeping your repayments to a minimum.
One thing to look out for when comparing interest rates is whether it is fixed or variable. A fixed rate means that the interest will be charged at a set rate for a specific time frame (which may even cover the entirety of the loan, depending on the term). A variable rate means it can vary in line with the Bank of England or the lenders chosen base rate, meaning the payments will fluctuate over time.
Interest will be factored in your repayments rather than charged separately. However, some lenders may charge it differently (such as daily versus monthly), so reading the small print beforehand is essential.
Arrangement fees
An ‘arrangement fee’ refers to the admin cost that a lender will charge to arrange a loan for your business. This could include any expenses undertaken to process or submit documentation relating to your loan, and may include broker fees.
Many lenders will charge this as part of their services. It varies between lenders, so it’s worth comparing the figures between different providers.
Broker fee
Many businesses will choose to work with a financial broker who understands the broad range of products in the market and can pair you with a loan that best serves your needs and eligibility criteria.
If you use a broker and they successfully refer you to a loan, you will need to pay a fee to cover their work. Again, this is a fee that you negotiate with the broker.
Bank transfer fee
The lender charges a bank transfer fee to cover any expense undertaken when transferring the loan funds into your bank account. The cost will vary depending on the lender and the bank, though it’s usually minimal.
It’s worth noting that bank transfer fees are becoming increasingly rare due to updated banking processes that remove the need for fees. However, there may be limited cases where they still exist – and you must be aware so you can factor it into your costs.
Processing fee
A processing fee, sometimes also known as an origination fee, cover the overall processing costs required to complete and maintain your loan for the entirety of its term. Some lenders may charge this interchangeably with an arrangement fee or may even charge both.
Again, the cost will vary between lenders, so it’s worth comparing the figures between different providers.
Late payment fee
Lenders commonly charge late payment fees if you miss a payment. It is used to mitigate the inconvenience faced by the lender and any costs that may be associated with your failure to pay. It also acts as a penalty for missing a direct debit, encouraging businesses to stay on top of their repayment schedule.
Most lenders will charge a set amount. Some may have a structure that raises the amount if it is the second or third time a payment is being missed. If you believe you’re going to miss a payment, it is worth talking to the lender as they may be willing to waive the fee if you have a valid reason.
Other fees
While these are the main fees a lender could charge, there may be other fees you need to account for. This will be specific to the type of finance you are using and the lender you are working with.
Take the time to understand any fees associated with the loan you are committing to. Most lenders will provide a list of fees in their documentation, which will set out the costs, when they will be charged, and at what amount.
If it’s unclear, be sure to speak to the lender or your broker to get a better picture to avoid any unexpected expenses later.
Conclusion
By making yourself familiar with the fees that may be charged as part of your loan, you will better grasp the financial commitment required by your business and whether the loan aligns with your affordability.
While the nature of a loan is that additional costs will be required, meaning you ultimately end up paying more than you borrow, you can still achieve the correct balance to acquire funding and improve your cash flow.
However, to get the best possible deal for your business, it’s essential to shop around different providers until you find a solution that fits your needs and offers competitive rates – including a lower-interest rate and as few additional fees as possible.
We can help you through the process of choosing and applying for a business loan, including finding options with minimal fees.