7 hidden business loan fees to watch out for

Fees are attached to so many of the transactions we make every day. We’re thinking about online booking surcharges, credit card processing fees, and unexpected interest rate hikes. These fees are often hidden in the fine print, making it difficult to know what you’re in for when you’re signing up.

Some of these fees are even designed to catch you off-guard, and the first you know of them is when the money has already left your bank account.

The truth is that there are also a number of hidden fees and charges associated with business loans. Here’s a quick checklist to keep you on your toes when you’re shopping around for the right loan for your small business.

7 business loan fees to be aware of

Origination fees

The process of assessing and approving a loan application can be time-consuming for lenders, as they need to verify your details and review your financials. For this reason, many try to make back some of their time and labour by charging an ‘origination fee’ for their service (sometimes referred to as a loan establishment or loan processing fee).

This fee is usually a percentage of your total loan amount, so you can imagine how quickly this fee could rise.

External fees

External or ‘third-party’ fees are specialised business loan fees associated with certain services. For example, a lender may need to get a valuation from an appraiser to help them determine your loan eligibility. External fees will vary from case to case, so be sure to keep an eye out for any unexplained expenses and ask the lender, broker, or advisor to give you a rundown.

Prepayment or break fees

As the business owner, you want to be paying off your loan as soon as possible. However, your lender wants the loan to last for the full term so as to earn the maximum amount of interest. To insure against this, some lenders will penalise you by charging a prepayment or break fee if you attempt to pay back your loan quickly.

This can have a big impact if your situation changes and can limit your options in the future. Always ask the question, and be sure to double-check the terms and conditions.

Late payment fees

While you may not want to pay off your loan too early, you also don't want to miss a repayment deadline, as this can result in penalty charges. Late payment charges can be flat fees or a percentage of the overdue amount and, in the case of continued late payments, lenders can even increase the loan's interest rate.

To avoid these fees, consider setting up automatic payments and create a budget to ensure you always have enough money to cover repayments.

Banking and payment fees

Some lenders prefer certain forms of payment, such as direct debit. In some cases, there may be high fees for using other payment methods so as to encourage you to use the preferred method. Be aware of this when you set up your payment system to avoid any bill shocks.

Watch out for any dishonour fees too, as both your bank and the lender may impose them, if they attempt to debit your nominated account and the transaction is unsuccessful.

Maintenance fees

Lenders may also charge a maintenance fee, which is typically a fixed dollar amount charged monthly to simply keep your account or loan facility open. This can add a significant amount to the total cost of the loan, so price it up before you sign.

Settlement fees

The lender may charge a settlement fee (also known as termination or dischargee fee) when your loan is finalised and fully paid to cover the administrative work of closing your loan account and checking all obligations (legal and financial) are settled.

Setting your small business up for success

Knowledge is power when you’re negotiating the terms of your business loan. When you’re comparing loans, follow these three simple steps to know what fees you might be up for:

1. Know what fees to look out for by doing your research and listing out all the questions you need to ask.
2. Ask your broker, lender, and anyone else associated with your loan to give you their fees upfront and in a dollar figure, rather than a percentage.
3. Compare your different loan options using the fee information as a guide (and don’t forget to think about the other features of the loan, such as term and interest rate).

What to do if you think you’ve been ripped off

If you think a lender has taken unfair advantage of you and/or has not properly informed you of the associated fees, you have a few options. All lenders and financial institutions must follow the guidelines of the Australian Securities and Investment Commission (ASIC), a government organisation that protects consumers [1].

Start by talking directly with the lender about the problem. If you are unhappy with their response, you may refer your case to the Credit and Investments Ombudsman, an organisation that provides a free dispute resolution service.

We can help you tackle business loan fees

While some lenders continue to find inventive ways to charge fees, you can avoid a lot of money and stress if you know what to look out for. What’s more, there are usually other lending options with fewer fees—you just have to be prepared to shop around.

If you’re currently looking for a business loan or have a business loan offer on the table but want someone to sense-check the terms, get in touch with the Valiant team. We’d love to have a chat and help you where we can.

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References

1. https://asic.gov.au/