It pays to be aware of all the costs involved in taking out a loan to equip yourself financially. It’ll also help you make more informed decisions when comparing loans and choosing one that best meets your needs.
The cost of a business loan depends on the type of financing you’re receiving, as well as the lender. That said, it should be in your best interest to research before applying. While you do this, you should also be prepared to answer any questions that may arise from the lender.
Read on to learn more about the various associated costs of business loans.
What Is A Business Loan?
A business loan is a form of financing that helps small businesses grow. It’s often used to purchase equipment, renovate or repair, hire additional employees, and more. In short, it provides you with the capital needed to run your business efficiently and effectively.
A business loan can be secured or unsecured, depending on your credit score and financial situation. For instance, you may qualify for lower Australian business loan interest rates with an unsecured loan if you have a good credit score and a steady income. However, if you don’t have any collateral to offer as security for the loan, it’ll likely be considered riskier by lenders and, thus, charge you higher interest rates.
Read more: 5 Types of Business Loans in India
8 Types Of Business Loans Fees
Business loans entail several costs, which include:
1. Application Fee
Many lenders will charge an application fee, typically a percentage of the total loan amount. For example, if you’re applying for a US$10,000 business loan and your lender charges an application fee of 1%, it’d cost you US$100. It’s important to note that this fee isn’t usually refunded if your application is rejected or withdrawn.
2. Compliance Fee
It covers the cost of ensuring that your application meets all requirements set forth by federal and state laws. This process includes verifying that you have adequate income to repay your loan, conducting a credit check on you, and making sure that there are no errors in any documents you provide.
A compliance fee is assessed when your lender finds out that you didn’t disclose something important on your loan application, such as filing for bankruptcy. It can happen because of fraud or negligence.
3. Origination Fee
Many lenders charge a flat origination fee, typically a percentage of the total loan amount. It’s similar to an application fee, but it’s a one-time charge that covers the costs of processing your loan. It typically ranges from 1% to 5% of the total loan amount, but it can be higher if you have bad credit or are applying for an unsecured loan.
4. Commitment Fee
Lenders assess a commitment fee for agreeing to provide you with a loan. It’s typically 1% of the total loan amount and can be charged upfront or upon closing. In addition, the fee is also assessed to cover the lender’s costs of processing and underwriting your loan application. This means you don’t have to pay this fee if you don’t receive a loan.
5. Prepayment Fee
This loan fee is assessed when you pay off your loan early. It can happen either through a lump sum payment or by making regular payments over some time. Moreover, it’s typically charged on all types of loans, including mortgage, auto, and personal loans. It ranges from 0.5% to 5%.
6. Administrative Fee
This type of business loan fee is charged by your lender when you apply for a loan. It covers processing your application, including verification of your income and employment status, credit check, and underwriting. It also covers the cost of obtaining an appraisal and title search on any property secured as collateral for your loan.
7. Late Payment Fee
This type of fee is charged when you don’t make your payment on time, usually around 5%. It’s assessed to cover the late payment’s cost and ensure that the lender receives the payments to which they’re entitled. It may also be assessed when a borrower defaults on their loan by failing to make payments for an extended period, generally after 90 days.
A late payment fee is often higher than other types because lenders have to hire lawyers and professionals to help them recover their money.
8. Courier Fee
A courier fee is charged when your lender needs to send some documents to you during the loan process. These can include your credit report, application forms, or tax returns. The cost of couriering these documents will depend on the distance between you and whoever’s receiving them and how many documents they need to carry. A courier is also used if you want your application sent overnight or internationally.
You should be wary of these fees before applying for a loan so you won’t be caught off guard when paying your dues.
Lenders charge different fees for different loans, but they’re usually quite similar. You must know what fees are associated with your loan before signing any documents to avoid unexpected costs after the fact. If you need clarification on the fees associated with a particular loan, ask for more information from the lender’s representative. They’ll explain all the details about your loan and answer any questions that you have.