Securing a loan is an important step toward reaching your business financial goals. Maybe you’re thinking about growing your small business, investing in new equipment, or simply navigating a tough patch.
While most people focus on interest rates when considering a loan’s affordability, it’s often the hidden or overlooked costs that catch you off guard and eat into your budget. These can snowball into disastrous financial burdens if you’re not careful.
Let’s break down the common costs many borrowers overlook and strategies to avoid them.
Why Are There So Many Fees When People Borrow Money?
Banks and lenders charge fees for various reasons, from administrative costs to risk management. Each fee serves a purpose in the loan process, but keeping track of them all can be overwhelming. As a business owner, part of the job is understanding these kinds of things and knowing how they may impact your overall cost of borrowing…as well as your company.
While these fees may seem insignificant compared to the total cost of borrowing, they can add up quickly.
Tips to Avoid Being Blindsided By Fees
The best way to avoid being blindsided by hidden costs is to do your research and ask questions. When looking for a loan, shop around and compare offers from different lenders. You’ll get better interest rates and a deeper understanding of the fees associated with each option and gain invaluable knowledge of how financial institutions operate.
Review your loan agreement before signing. Ask the lender about any fees that seem unclear or excessive. It’s always better to clarify and understand all costs upfront rather than being surprised later on.
Another helpful tip is to keep an eye out for loans with no prepayment penalties or late payment fees. While this may result in slightly higher interest rates, it can save you money in the long run by avoiding hefty penalty fees.
Commonly Overlooked Costs
You had a water main break at your office. Maybe you need to hire a software development partner on the fly. Business owners always need money, and the reasons are always different.
Don’t rush too much. Those hidden fees can get you. Here are some key costs you need to keep an eye on:
1. Origination Fees
These fees cover the administrative costs of processing your loan. For example, on a $100,000 loan, a 3% origination fee means you’ll pay $3,000 upfront just to take out the loan. If you’re looking for SBA loan rate insights, you’ll be happy to know they do not have these types of fees!
Why it matters:
Borrowers often get approved for a loan thinking they’ll receive the full amount borrowed, but origination fees reduce the funds you actually receive. That mismatch between expectation and reality can disrupt plans if you don’t account for the fee while budgeting.
2. Prepayment Penalties
Paying off a loan early sounds like a responsible financial move, right? Unfortunately, many lenders don’t see it that way.
Some loans include prepayment penalties to discourage borrowers from paying ahead or refinancing.
While these penalties may seem counterintuitive, they’re designed to help lenders recover the interest income they lose when loans are paid off early.
Why it matters:
Imagine you’re working hard to pay down your loan faster, only to realize you’re being punished for trying to save money. A prepayment penalty might erase any savings you would have earned by reducing the loan’s term.
3. Late Payment Fees
Late payment fees may seem straightforward, but they’re often steep – and they can add up quickly, usually $30-$50 a pop, if you’re struggling to make on-time payments. You can’t really avoid them either, with payment technology being on point these days.
Why it matters:
Some agreements specify a grace period, but failing to catch this detail can lead to confusion and unnecessary fees. Worse yet, repeated late payments could affect your credit score, compounding your financial challenges.
4. Hidden Charges
Lenders often include fees for document preparation, underwriting, title searches, and even payment processing. These “hidden charges” aren’t always upfront during initial discussions.
Why it matters:
These small fees seem harmless when viewed individually, but together, they can add hundreds – or thousands – of dollars to your total borrowing costs. The lack of transparency around these expenses makes it difficult to budget accurately.
Master Your Borrowing Decisions
Taking out a loan can be an empowering step toward achieving your goals, but business owners need to go into the process with their eyes wide open.
Understanding and accounting for commonly overlooked costs like origination fees, prepayment penalties, late payment fees, and hidden charges will prevent nasty financial surprises from derailing your plans.
Take the time to read the fine print, ask questions, and plan ahead. When you’re proactive and informed, you can turn borrowing into a tool that works for you – not against you – on your path to success.
