The truth is, that there are also a number of hidden fees and charges associated with business loans. Here’s a quick checklist to keep you on your toes when you’re shopping around for the right loan for your small business.
The process of assessing and approving a loan application can be time-consuming for lenders, as they need to verify your details and review your financials. Many lenders try to make back some of their time and labour by charging an ‘origination fee’ for their service. This fee is usually a % of your total loan amount, so you can imagine how quickly this fee could rise.
External, or ‘third party’ fees, are specialised business loan fees associated with certain services. For example, a lender may need to get a valuation from an appraiser to help them determine your loan eligibility. External fees will vary from case to case, so be sure to keep an eye out for any unexplained expenses and ask the lender, broker or adviser to give you a run-down.
Prepayment / Break Fees
Don’t sign on the dotted line until you’re absolutely sure that you’re abreast of any early repayment or break fees that you could be in for.
Essentially, you want to be paying off your loan as soon as possible. However, your lender wants the loan to last for the full term so as to earn the maximum amount of interest. To insure against this, some lenders will penalise you by charging a prepayment or break fee if you attempt to pay back your loan quickly. This can have a big impact if you situation changes and can limit your options in the future. Always ask the question, and be sure to double check the terms and conditions.
Banking & Payment Fees
Some lenders prefer certain forms of payment, such as direct debit. In some cases there may be high fees for using other payment methods, so as to incentivise you to use the preferred method. Be aware of this when you set up your payment system to avoid any bill shocks. Watch out for any dishonour fees too, as they may be imposed by both your bank and the lender. Dishonour fees may be charged when an attempt is made to debit your nominated account and it is unsuccessful.
Lenders may also charge a maintenance fee, which is typically a fixed dollar amount charged monthly to simply keep your account or loan facility open. This can add a significant amount to the total cost of the loan, so price it up before you sign.
Setting your small business up for success
Knowledge is power when you’re negotiating the terms of your business loan. When you’re comparing loans, follow these 3 simple steps to know what fees you might be up for: Know what fees to look out for by doing your research and listing out the questions you need to ask to ensure you don’t miss anything.
Ask your broker, lender and anyone else associated with your loan, to give you their fees upfront and in a $ figure, rather than a percentage (%).
Compare your different loan options using the fee information as a guide (and don’t forget to think about the other features of the loan, such as term, interest rate.
What to do if you think you’ve been ripped off
If you think a lender has taken unfair advantage of you and/or has not properly informed you of the associated fees, you have a few options. All lenders and financial institutions must follow the guidelines of the Australian Securities and Investment Commission (ASIC), a government organisation that protects consumers.
Start by talking directly with the lender about the problem. If you are unhappy with their response, you may refer your case to the Credit and Investments Ombudsman, an organisation that provides a free dispute resolution service.
We can help you tackle business loan fees
While some lenders continue to find inventive ways to charge fees, you can avoid a lot of money and stress if you know what to look out for. What’s more, there are usually other lending options with fewer fees - you just have to be prepared to shop around.
If you’re currently looking for a business loan or have a business loan offer on the table but want someone to sense-check the terms, get in touch with the Valiant team. We’d love to have a chat and help you where we can. Our dedicated Credit Solutions team will be in your corner, and have 35+ years of combined industry experience to find your business the best loan possible.
Alex is the co-founder and CEO of Valiant Finance. He brings a wealth of experience from his time as a banking consultant at McKinsey, and has a background in Business and Law.