Introduction to Loan Borrowing Cost
When shopping for low-cost funds to help grow your small business, you’re going to come across fees that will add to the amount you owe. It’s important to include those fees when calculating how much debt you can take on. Be sure to check with your lender so that all extra costs are disclosed before you sign on the dotted line. Here’s a list of fees you might come across.
This fee reflects the cost required by the lender to process a loan application and other administrative work involved. Commonly charged in the form of a percentage of the principal amount, origination fees are often deducted from your loan proceeds before you make required payments. If you choose not to accept the loan, this fee won’t be charged.
Processing or Application Fees
As part of underwriting, both a business and a personal credit check might be run along with a background check. Underwriting costs pay for the time and effort it takes to run these reports that help lenders evaluate the loan risks. Some lenders charge application fees; others might charge nothing until the loan is issued.
Maintenance or Servicing Fees
These fees are for facilitating the payments, sending out reminders, for customer service help, etc. Fees are charged on a monthly, quarterly, or bi-annual basis, depending on the lender.
The U.S. Small Business Administration (SBA) doesn’t directly lend money to a small business. Instead, it provides guarantees on a portion of small business loans, enabling banks to offer more loans and lower interest rates. For SBA-guaranteed loans, lenders must pay the government a portion of the amount guaranteed. That cost is passed onto the borrower as a guarantee fee. This fee is based on the loan’s maturity and the dollar amount guaranteed, not the total loan amount.
Unsuccessful Payment Fee
If your bank rejects payments to the lender, an unsuccessful payment fee may be charged. Reasons for payment rejections could be insufficient funds, a closed account or a hold on your bank account. These are usually flat fees and the amount will vary from lender to lender.
Late Payment Fee
Lenders may have grace periods after the payment deadline. During these grace periods, the borrower will not incur any penalties. However, if a borrower fails to pay after the grace period, a percentage or flat fee may be charged. Lenders may charge borrowers more than once, depending on the contract set forth.
Check Processing Fee
Some borrowers still use paper checks to send in loan payments. Doing so can incur an extra cost – either a flat fee or a percentage. Whenever possible, make loan payments electronically to avoid this fee.
A prepayment penalty is a fee, usually calculated as a percentage of the outstanding principal balance, charged by some lenders if a loan is paid before its maturity date. SmartBiz SBA loans have no prepayment penalties.
Transparency is extremely important when you are shopping for lenders. Make sure your lender is readily available for questions and will clearly explain how fees and penalties will impact your overall loan cost.
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