Business loans are a smart and convenient way to get capital for your business. However, there are crucial factors to consider when considering a business loan. One of the most significant factors is loan processing fees and related charges levied by a lender.
You may be unaware of these charges when you avail a business loan. While some lenders include fees during loan processing, others may collect them at the end of the loan tenure. Hence, it is important to read the fine print and know how much you stand to pay for services and facilities on your business loan.
If you are a first-time business loan applicant, having sound knowledge of these fees is essential. Read on to know various business loan charges that can affect your loan repayment amount.
1. Processing Charges on Your Loan Application
Loan processing charges include banks or other financial institutions levying for services. You must pay a flat fee for a business loan. Note that these charges vary from one lender to the other.
Banks or NFBCs charge approximately 2% and 6% of your loan amount as processing charges. This charge is levied to compensate for various administrative costs during loan application.
While some lenders may charge processing fees upfront, others may charge when your loan term is complete. Remember that the lender may not refund this amount even when you cancel your loan application.
As a norm, most lenders levy these charges when you submit your application for a business loan. Apart from administrative costs, checking your credit score or approval for the loan is included in processing charges.
Hence, you need to compare available options and choose a lender accordingly. For instance, when you avail of an IIFL Finance Business Loan, you may have to pay processing charges of 2- 4%. This may vary with an Axis Bank Business Loan. So, do a thorough analysis before you select a business loan.
2. Documentation Processing Fees
Documentation processing fees are specific charges you must pay to verify your loan documents. When you apply for a business loan, you are bound to submit the required paperwork.
All these documents need verification from a lawyer or a designated authority. Hence, lenders levy documentation processing fees, including all costs related to this verification process.
In addition, the financial institution has to make new documents, such as a new loan agreement detailing the terms and conditions of your loan. This documentation processing fee includes the cost of handling all these document charges.
3. Late Payment Fees on Your EMI
There may be instances when you need to pay EMIs within the due date. As a result, lenders charge a late payment fee on your EMI. This is a small percentage of your EMI amount charged above your monthly instalment after the due date.
The late payment charge ranges between 1-5% of the EMI amount. Note that the lender decides this percentage. However, you can negotiate your business loan charges with the lender before finalising your agreement.
4. Prepayment or Foreclosure Charges
A foreclosure charge is another important factor you must know before obtaining a business loan. The charge applies to your outstanding amount if you close your loan account before the tenure.
While many banks and NFBCs may forego these charges, discussing with your lender before getting a loan is important. This can quickly negate any savings you would have made from prepaying the loan. Hence, comparing these charges across lenders can help you select the right lender.
5. Insufficient Fund Charges
After the loan approval, lenders apply an auto debit facility to your registered bank account. However, in case of insufficient funds in your account during an instalment payment, you will receive a notification about the failed payment.
In these circumstances, lenders may levy an insufficient fund charge on manually paying the pending EMI. This is a flat amount applied over and above your due instalment. However, you can negotiate with the lender before you sign your loan agreement.
You can easily avoid this penalty by planning a proper monthly budget. Alternatively, you can link your bank account with a fixed deposit with a sweep-in feature. This ensures that your bank account always has sufficient funds for auto-debit monthly instalments.
6. Cheque Bounce Charges
A cheque bounce can happen for many reasons, such as insufficient balance or an error in writing the cheque. Since lenders allow you to repay your dues with cheques, you must do so well before the due date.
This helps ensure the cheque gets cleared on time, and you can avoid a check bounce penalty. Like insufficient fund charges, it is a flat charge applied over and above the due amount.
Some lenders may require you to pay ₹500 as cheque bounce charges. However, this amount may vary depending on the lender you choose. Banks can charge you for their services and facilities in many other ways.
Sometimes, individual charges are packaged under umbrella terms that you must pay before the loan disbursement. In other cases, these charges may also be a part of your EMI.
Here are a few other hidden business loan charges you need to watch out for:
- Underwriting fees
- Loan packaging fee
- Draw fee
- Closing cost
- Stamp duty
- Switch fee
- Loan cancellation charges
Knowing these fees is crucial to estimate the total payable amount. Remember that these business loan charges vary across lenders. Hence, it is prudent to consider this factor before zeroing in on a lender.
These charges and interest rates could increase the cost of borrowing. So, analysing the lender’s terms is essential to avoid these fine-print business loan charges. Always communicate with your bank to understand the charges applied to your business loan.
Read More: 5 Tips to Apply for the Business Loans
