8 Fees and Costs Associated with Small Business Loans

Small business loans are nothing unusual in today's world. Actually, they happen all the time only the problem is to find the right one for you. This includes finding the right interest rate, repayment period and of course the right amount you can ask for.

However, there are other things to consider before signing the loan agreement and that regards the fees and costs. Usually, the sum you need and repayment method will look perfect, like the best deal in the world, but that can be because you forgot to calculate associated costs. Even penalties, which may come to be, have to be accounted for so that you would know that exact figure you might face in the end.

Therefore, here are some of the most important fees and costs associated with small business loans you should know about before accepting the loan.

1. Interest Rate

An interest rate is an additional sum to the amount you borrowed and depends on your lender. Every lender uses this cost to make a profit off loaning you money. Additionally, you will have to be realistic about your credibility since the riskier you are the higher the interest rate can be.

Before you accept a deal, see other offers for loans and examine the interest rate of other lenders. You can calculate the amount you will repay to the lender in the end by using the simple interest calculation. You can do this by multiplying the amount you applied for with annual interest rate and duration of the loan.

Another way to calculate this fee is by using the compound interest which a little bit more complicated. It would help you calculate even the interest on the interest that might occur in some cases even after you repaid your debt. No matter what type of calculation you use, remember that the interest rate is always there and you can't avoid paying it.

2. Annual Percentage Rate

Besides the interest rate, you will have other different fees and costs and by combining them all together you will get the Annual Percentage Rate. This will all be summed up in one figure representing the total cost of your small business loan. This is an important item in the loan offer to look after besides the interest rate since it also can vary from lender to lender.

The true power of the Annual Percentage Rate is that it will help you see how much you will have to pay on top of the principal sum. Both interest rate and Annual Percentage Rate serve to help you come to an informed decision and find the best possible loan for your company. After all, you will need to spend a considerable amount of time repaying it, so it's always wise to plan ahead.

3. Factor Rate

Short-term loans and cash advances use factor rate which is similar to interest rate only expressed in decimal figure instead of a percentage. It's also really easy to calculate it into the overall loan by simply multiplying the principal sum by the factor rate.

Let's say you have to borrow $20,000 for a year at the factor rate of 1.40. The total amount to repay in the end would be $28,000 which means that your interest rate is 40%. This is a more expensive type of loans, but if you want to borrow money for a short period of time, it's what you will have to deal with.

4. Origination Fee

Origination fees include all the administrative costs lenders have when approving your loan. It takes time to get a loan and it requires a lot of paperwork as well, not to mention communication between your agent and the headquarters. So, all these costs are summed up in one figure expressed in percentage and the amount will depend on the lender.

5. Application Fee

Appraising your business and checking your credit is another activity that a lender must perform in order to see if you are eligible for a loan. This will also cost you and is filed under the application fee. This is declared when you look over the conditions of a loan, but just in case ask your agent to give you the exact numbers as well.

6. Late Payment Fee

There is a general rule not to be late with your payments since you will most likely have to pay the Late Payment Fee. Even if you are absolutely sure that you will pay every installment in time, include this fee in your calculations. That way you will be prepared for this expense if it comes to be for any reason over the duration of the loan.

7. Underwriting Fee

Underwriting fee is similar to the application fee and is paid for the underwriting services during the loan application process. When applying for a business loan, the lender has to examine the market, insurance, and mortgages to see for what loan conditions you qualify, if any. This procedure is also something you can't avoid, so you better calculate this fee in your overall loan cost as well.

8. Prepayment Penalty

While there is logic in paying a penalty for being late with your installments, the prepayment penalty may leave you perplexed. This is because you observe the small business loans as just another type of borrowing money where the lender will be glad you repaid them in full and even before the deadline. However, here this is not the case.

As you already know, the interest rate will help your lender profit from loaning you the money. If you repay your debt early, then they wouldn't be able to make the predicted profits off your loan. This is why some lenders may charge for this, although you may still find a loan without it.

Final Words

Before you decide on the lender, make sure that you examined all your options and other offers since the conditions and requirements will vary. Always read the fine print and don't be afraid to ask questions, even the simplest ones, if you don't understand something. It is in your potential lender's best interest to win you over and give you the best possible loan deal so you would choose them.

After all, it's good for business.

Guest Author

Neil White

Neil White is a student of digital marketing, who likes to travel a lot. While you are reading this he is probably somewhere other than where he was yesterday.