By Raf Hussain, Business Development Manager, Nucleus Commercial Finance
If you’re a small business owner looking to secure finance from either a bank or an alternative finance provider, it’s important that you pay close attention to every detail in your loan agreement.
Unfortunately, extra fees are often not presented upfront and can be hidden in the small print. If checked too late, these unexpected costs can impact your budgetary forecasts and increase your capital as well as operational expenditure.
To help you know what to look out for, we’ve outlined four of the most common ‘hidden fees’:
The arrangement fee
This covers the cost of arranging your loan. It’s a one-off admin fee, anywhere from 1% to 10% of your total funding limit and gets charged at the start of your contract.
In bigger deals the amount adds up to quite a substantial sum so don’t ignore your contract’s small print. Sometimes the arrangement fee is excluded in smaller deals, but don’t assume it will be – always check!
Survey or audit charges
Most financial institutions will want to evaluate your business assets and balance sheets before offering you a loan – and again at various intervals during your loan agreement. Different vendors charge a different fee for doing this but usually it’s between £500-800. Remember though, audits can take place quarterly which means that’s a potentially hefty expense to suddenly have to budget for every three months.
These unexpected, recurring costs can in fact negate the very reason you signed up for a loan in the first place and put your cash-flow under pressure.
The take-on fee (also known as retro commission)
When work has been invoiced but customer payments are late and your cash-flow is thus compromised, your loan provider can help you – at a price – with an invoice finance facility. However, typically a take-on fee is charged to assume responsibility for the unpaid invoices and to provide you with finance for a percentage of the amount owed to you.
This fee is typically around 2% of the total invoice value and is considered a non-negotiable by all financial institutions.
Trust account charges
When using an invoice discounting facility, be aware that there is a fee charged every time an outstanding invoice is paid into your trust account – and it needs to be paid before any remaining balance will be transferred to you.
At 0.1% to 0.2% of the amount received, these so-called trust account charges can seem small. However, if you need to clear a backlog of invoices, or your customers are repeatedly late with payment, your financial assistance can become unexpectedly expensive.
Here’s an example to bring these hidden fees to life. We recently met with a computer maintenance company that had been approved for a loan of £200,000 with a discount fee of 1.5% above the base rate (0.5%).
Based on those figures the company understood that its financial assistance would cost them a total of £75,000 over three years.
Unfortunately, the real amount was far higher as their loan agreement contained several hidden fees, and when all added up their loan cost them £97,550 – 30% more than what they had originally planned for!
Always check for fees hidden in the small print
Don’t take your lender’s word for it, read through every document in detail before you sign it. This lack of transparency is unfortunate but real, so don’t be taken in by attractive base rates and always check the small print for hidden fees!
If you’re concerned with your current loan, or are in the process of negotiating financial assistance and would like to double-check the numbers, we’ve created a calculator that will add up all the fees and work out the total cost to you.