As a small business owner, you’re eager about the prospect of obtaining capital to grow your business. You’ve done your research and looked at different lenders to partner with for the long-run. We recently shared an infographic on different loan options for small business owners, comparing apples to apples on factors such as loan amounts, payments, terms, and annualized percentage rate (APR) ranges.
As you research various loan options and skim through the fine print, you may find yourself confused, frustrated, or overwhelmed at the terminology. Even more so, you may be asking “What additional costs am I unaware of? How much does my loan really cost? And most importantly, what do all of these fees mean?”
Smart business owners possess the acumen to execute timely strategic decisions, but they also need the right information to assess all their options objectively and position their company for financial success. Having a fundamental grasp on annualized percentage rate (APR) is not enough. The more information you have at your disposal, the better your decision will be.
Below is a list of potential different borrower fees you’ll encounter when applying for financing. Understanding these fees and looking out for them prior to loan selection is crucial.
The interest rate is the amount charged, expressed as a percentage of the principal (total amount lent), by a lender for the principal borrowed.
Annualized Percentage Rate (APR)
An APR shows you the cost of borrowing money (i.e., interest rate) on an annual basis. This is the most common form of pricing for other financing you have likely secured (i.e. student loans, home mortgages, credit cards, etc.)
Factor rates are used by factoring companies, a type of alternative lender who buys one or more of your invoices, advances you a certain amount of the invoice, and then collects the invoice for you and keeps the certain cut. This “cut” retained by the factoring is considered the factor rate. The factor rate is expressed in a percentage. Remember, when a factoring company quotes their price as a percentage, it is the percentage of the invoice’s value, not APR.
Buy rates are associated with a Merchant Cash Advance (MCA). A MCA is a short-term loan that is often offered to young businesses that do not have other funding options. MCAs quote their loans in terms of the “buy rate” (a payment multiplier), such as 1.3, 1.4, or 1.5. For example, the total amount owed on a $100,000 loan with a 1.3 buy rate is $30,000 plus $100,000, or $130,000.
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 prior to any required payments. If you choose not to accept the loan, this fee won’t be charged.
Processing or Application Fees
As part of underwriting, a credit check may be assessed against your business and your personal credit score, in addition to a background check. Underwriting costs reflect the amount of time and effort necessary to properly evaluate the risk or likelihood of loan repayment. Some lenders may charge application fees; others may charge you nothing until the loan is issued. Make sure to clearly read the fine print.
Maintenance or Servicing Fees
Fees may be charged on a monthly, quarterly, or bi-annual basis, depending on your lender. These fees cover the costs of handling payments, sending out reminders or notices, customer service, etc.
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, and this cost is passed on to you -the borrower – as a guarantee fee. The guarantee fee is based on the loan’s maturity and the dollar amount guaranteed, not the total loan amount.
Unsuccessful Payment Fee
If your monthly payment to the lender is rejected by your bank, an unsuccessful payment fee may be charged. This failure can be due to insufficient bank funds, a closed bank account, or a suspension or hold on the account. These fees are generally flat (e.g., $15) and will vary accordingly to the lender.
Late Payment Fee
Lenders may have pre-established 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
Many borrowers enjoy the convenience of making payments via ACH. Others feel more comfortable sending in paper checks. When processing the monthly loan payments, some lenders may charge a check processing fee for checks mailed to the company. These fees may be charged in the form of a percentage or flat 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. These penalties can exist for a variety of reasons – some more legitimate than others – but they often have to do with compensating the originator or investor for costs incurred with entering into the transaction that will not be recovered over the life of the transaction due to prepayment.
It is important that the small business borrower ask their lender to explain each of the fees they will be charged, so that they can appropriately compare pricing from one lender to another.
Transparency and clarity are a must for whatever lender you select. At Dealstruck, we understand that acquiring proper financing takes planning, preparation, and time. After you apply for a loan using our user-friendly Dealmaker technology, you’ll have a chance to talk with our Sales Team – we’ll explain any questions you have regarding borrower fees and more.