Figuring out what type of business loan works for you is just the first step, deciphering the fees and charges to determine the “real” cost to your business can put daylight in-between the effect on your bottom line.
Every small business owner is eager to take on a new loan once approved and can often overlook or is simply confused by terminology used in loan offers and contracts.
Smart business owners need the right information to assess all their options and position their company for success. Most business owners simply look at the interest rate, when they should be considering all charges on the loan that will determine the Annualised Percentage Rate (APR).
You should only be taking loans from lenders that clearly and simply display all fees, interest and charges and isn’t masking anything with fancy terms to confuse you. Sometimes you might say that you do understand something to not look foolish however, you should ask as many probing questions as it’s your hard earned money at the end of the day.
Below is a list of potential different borrower fees you’ll encounter when applying for financing.
The interest rate is the amount charged, expressed as a percentage of the principal (total amount lent), by a lender for the principal borrowed.
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.)
Discount rates are used by invoice 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 discount fee. This “discount” retained by the factoring company is considered to be the fee charged on a per invoice basis. The discount rate is expressed in a percentage (e.g. 3% discount fee on a $100 invoice is $3). Remember, when an invoice factoring company quotes their price as a percentage, it is the percentage of the invoice’s value, not APR. Figuring APR costs can be confusing and often leads to incorrect calculations.
— Waddle (@getwaddle) August 11, 2015
Buy/Factor rates are associated with non-bank unsecured fixed term lenders. A short-term loan that is often offered to businesses that don’t have invoices or are retailers. Fixed term lenders quote their loans in terms of the “factor 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. Loans are very expensive however, are offered very quickly without offering any assets.
This reflects the cost required by the financier 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. E.g. you take a loan for $100,000 and the origination fee is 2% then you will obtain $98,000 from the lender at settlement.
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/Audit 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. Sometimes these can include Audit fees to assess your business on a quarterly basis to prove solvency or declining trading patterns.
Unsuccessful Payment Fee/Direct Debit Dishonour
If your daily/weekly/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.
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, especially relevant to fixed-term loan options. These penalties can exist for a variety of reasons – some more legitimate than others – but they often have to do with compensating lender for costs incurred with entering into the transaction that will not be recovered over the life of the transaction due to prepayment. E.g. they won’t make as much money out of you as they would have if you repay early and thus will try to recover some of this when paying out your loan.
Transparency and clarity are a must for whatever lender you select. Waddle understands that acquiring proper financing takes planning, preparation, and time. Once you link your accounting app to Waddle you will receive a loan offer detailing all the fees and charges for you to make a proper commercial decision based on our transparent pricing.