There may be more to a commercial bank loan than making interest and principal payments. Your business may get a great interest rate on your new line of credit or term loan, but you may cry on the way home when you discover hidden fees and charges.
Even seasoned borrowers can be surprised. Loan costs can increase by thousands of dollars, and the effective loan rate increases by many basis points as a result of these hidden fees.
Here are some of the fees and charges that can increase your business costs on bank loans:
Many banks charge commitment fees of ½% – 1% or more to issue a commitment to lend money. The fee is calculated on the amount of credit available. Commitment fees significantly increase the effective rate of outstanding loans.
These rates can be negotiated. If your business has a strong credit profile or if the competition between banks in your area is fierce, ask for a lower commitment fee or request a waiver.
These fees can be charged in place of or in addition to the commitment fees. Non-use fees typically range from ¼% to ½% of the unused line of credit. Although these fees are less onerous than commitment fees, they also increase the effective borrowing rate.
As with a commitment fee, you may be able to get a no-use fee reduction or waiver if your business has a strong credit profile or the banking environment is very competitive.
When your business has reason to restructure an existing loan, you can expect your bank to charge you a restructuring fee for the privilege. For example, if your business has reasons to convert a short-term loan to a long-term one, you will probably be charged for this restructuring.
These fees can range from ½% to 2% or more, plus legal bank fees or out-of-pocket costs. If your business has been a long-term banking customer in good standing, you may be able to negotiate or waive the fee. But don’t expect to eliminate bank attorney fees and out-of-pocket expenses.
Banking attorney fees
Attorneys’ fees generally come into play when the bank uses an outside law firm. To make matters worse, many outside bank attorneys require the borrower to retain an outside attorney to issue an opinion letter covering the transaction.
Typically, only the strongest borrowers in highly competitive banking situations can completely eliminate paying bank attorney fees. However, if your business is a valued customer, your bank may be willing to limit or reduce these fees. Banks often have some leverage with their law firms to obtain a discount.
Environmental appraisal / assessment fees
These fees are charged on many asset-backed loans. They usually involve bringing in an outside expert to evaluate equipment or real estate. These fees can be significant, depending on the type of assessment or environmental issue.
Like attorneys’ fees, appraisal or environmental evaluation fees are almost always borne by the borrower. Perhaps the best result one can hope for is having these limited fees or having the lender split the amount in some way.
Unanticipated audit expenses
Many banks reserve the right to audit borrowers or send bank personnel for inspections. An audit may be required to review accounting procedures or to monitor collections, inventory, or other aspect of your firm’s operation. In addition, some banks require external audits by public accounting firms in connection with the granting of credit. Any of these scenarios can result in significant expense and a substantial time commitment for your business.
Before signing, carefully review your loan agreement to identify any bank audit or inspection requirements. If your bank requires an audit or inspection that you did not anticipate, try to eliminate it or try to negotiate limits. You may be able to obtain a less stringent requirement or negotiate a less expensive alternative to the audit or inspection required by your bank.
If all else fails, try capping your audit or inspection fees.
Charges for late payments to your bank are generally within your control. These fees can be onerous and can significantly increase the cost of your business loans. It is not unusual to see banks add 300 basis points to a customer’s loan rate for late payments.
While it’s worth asking for a lower late fee during the loan negotiation stage, the best solution is to try to avoid these fees. If you can, try to reduce the delinquency rate to 75 to 150 basis points above your loan rate.
Expiration or failure to obtain a rate lock
In a stable rate environment, many banks are willing to lock in the rate on fixed rate credit transactions. Rate locks protect the borrower from adverse rate movements before closing. In most cases, fees can be held for up to 60 days. Fixed interest rates are not uncommon for real estate loans and equipment installment loans.
If your business is negotiating a fixed rate loan, try negotiating a fixed rate. You may pay slightly higher interest on the loan, but a fixed rate can eliminate a nasty interest rate swing.
Once you’ve locked the rate, try to stay within the waiting period to close the transaction. Most banks will enthusiastically and vigorously approve rate hikes in a rising rate market, if you don’t comply.
Many hidden bank fees and commissions can be reduced or eliminated if you plan ahead and are prepared to negotiate. You are in your strongest negotiating position before your bank issues a letter of commitment and before you sign the loan agreement. Always read commitment letters and loan agreements carefully. Look for hidden fees, hidden charges, and unexpected requirements. You can also ask your bank to prepare a separate list highlighting all potential fees and charges.