Managing a business and directing it towards sustainable growth and success involves several key requirements, with stable financing being one of the most crucial. There are many ways to secure such capital, and taking out business loans is the most popular option for many established business owners and entrepreneurs. Although, in most cases, one should primarily focus on key factors like interest rates when looking at loan options, it is crucial to pay attention to the related fees before reaching a decision, even if it may be challenging to compare them apples-to-apples. With that said, look out for the following five fees common in business loans.
1. Processing fee
Processing fees are the most common fees that banks and other financial institutions charge and the easiest to compare. Typically, it is determined as a percentage of the principal loan amount, around 1-3% of the approved loan. The reason for charging these fees on top of the interest is the labour involved in assessing loan applications. The easiest way to think of it is to compensate for the effort and time it takes to screen and review the numerous applications they receive. Thus, since processing fees are generally charged as a percentage of the loan amount, it will, in turn, be higher in net dollar terms the greater the business loan amount is.
2. Account maintenance fee or annual fee
Some lending institutions, typically banks, require an annual fee for maintaining the borrower’s credit facilities with the banks. However, this is uncommon for loan facilities with non-revolving terms fully drawn down on disbursement. Banks will generally levy annual fees for revolving credit lines like trade and overdraft finance facilities if they still maintain a given borrower’s credit facility. For most line limits under $1M, fees can range between $500 to $3000. Since banks will have to spend resources monitoring and reviewing revolving line facilities annually at the very least, this fee is used to compensate those resources exhausted for the credit review.
3. Credit insurance fee
Credit insurance fees are paid to third-party credit insurers for certain facilities needing separate insurance coverage. Trade finance credit facilities are one example, as they commonly require borrowers to make payments for an annual credit insurance fee of around 0.75% to 1.5% of the credit line. The government agency Enterprise Singapore helps support a portion of the credit insurance premium SMEs must pay if their Loan Insurance Scheme (LIS) includes the credit facility under its coverage.
4. Early repayment penalty fees
All lending agencies impose early repayment fees in their non-revolving loan contracts if borrowers repay their loan partially or entirely before their loan tenure ends. This fee exists to cover the loss of income from interest fees that they would otherwise earn throughout the loan repayment period. Most banks charge a penalty fee of around 2-5% of the principal loan amount. It is usually better to avoid repaying the loan early as the penalty fee may be greater than the savings earned.
5. Legal fees
Legal fees are typically absent in simple business loan facilities like unsecured term loans. However, they are required in more complex and secured loans, such as a loan for commercial property where the collateral is involved. Asset-based financing, such as equipment loans and property mortgage loans in Singapore, is the most common legal fee typically associated with business financing. Borrowers must pay legal conveyancing fees that depend on the size and complexity of the loan, usually costing around $2500 to $5000. Banks and other financial institutions will also request payment for property valuation fees that reach about $500 to $1000. Secured loans pledged as collateral for banking facilities may also entail borrowers to pay for legal expenses incurred in filing lodgment charges in the ACRA.
Most of the fees listed above are included in the loan term contract but are often missed by borrowers that do not take the time to read the fine print and thus mistakenly assume they are hidden charges. Some of the faults can be attributed to lending officers since they may not take the time to communicate these fees to applicants. As such, read everything before signing off on the contract to properly factor in these fees in your total borrowing costs. At OxProp Capital, we are dedicated to innovating and pushing the boundaries with our financial services and loan offerings to provide clients with the support they need to succeed. Get in touch with us today for all your financing needs and get the tailored solution that best fits you.