There are many things that you need to weigh up when considering taking out a loan. The value of the loan, its length, interest rate types and various terms and conditions all need to be evaluated to make sure you get the loan you require. Perhaps some important things to consider, however, are the various costs and fees that are incurred. Each loan will differ in this regard and can become more complex.
Types of Fees and Costs
As lending has become more flexible, the types of fees and costs inherent in each model can appear, at least regarding some loans, enormously complex. Most terms and conditions are easy to understand once explained one by one, however. Some of the costs which could be considered include:
- Setup Fees
- Early Repayment Penalties
- Miscellaneous Fees
Setup fees for loans are commonplace but not all lenders require one. Although the set up fee is a one-off payment, it can be quite a significant payment, particularly if you require the loan for the day-to-day running of your business. such as a working capital loan.
We have observed that the fee will typically be set at a percentage of the value of the loan, around 1% for larger loans, but these will differ depending on the lender and the type of loan you are accessing. Many loans do not require a setup fee but you should check whether other fees apply.
Interest is the most costly part of a loan, presuming you are able to meet the terms and conditions set out in the contract. Rates vary enormously and will depend on everything from term lengths - the longer the loan the smaller the repayments but the more you will pay, to your credit rating - the higher the risk to the provider, the higher the interest rates will be.
You may also need to choose between fixed and variable rates, which can significantly affect your repayment costs. Variable rates are those that can fluctuate, depending on the rates set nationally. These rates can be more cost-effective with shorter termed loans, if the national rate is set low enough. Fixed rates are those that are set at the start of the loan and are easier for the lender to plan around as they know exactly how much they will need to repay from the outset.
Early Repayment Penalties
Many loans, particularly longer termed and high value loans, can come with rigid repayment conditions that can end up being costly. We believe the most commonly problematic of these are early repayment clauses that stipulate any early repayments will incur penalty charges. This guarantees that the provider fully profits from interest rates set out in the contract of the loan.
As the funding market has become more competitive with the advent of online providers and alternative funding methods, such as asset and invoice financing, many providers now forego early repayment penalty charges. Short term loans may be less likely than long term loans to incur charges such as these as the profit on interest rates is usually much lower for the lender.
There are two areas of security that we believe must be taken into consideration before committing to a loan; these are asset liability and security fees. Asset liabilities, although strictly not a loan fee, are part of a secured loan, whereby a business’s assets, most often property, will be put up as security for the loan. If the repayments are not met, the assets become the property of the lender. It should be noted that in general it can be far more profitable for the provider to receive loan payments rather than a company’s assets, but when risking your home, great care should be taken.
The other is a security fee, which is a small fee incurred at the start of the loan and is therefore less consequential.
There are a variety of small fees that you may also be charged when taking out a loan. These include possible solicitors fees, security check charges and specific registration fees. While these charges can be relatively small, they can add up so you should be aware of them before signing any document.
Advantages and Disadvantages
While the disadvantages, such as risk and expense, may seem obvious, many successful businesses often require funding at some point in their growth and the vast majority may neither be profitable nor sustainable without this type of investment. Businesses of all shapes and sizes can benefit from the opportunities that a business loan can provide and we believe that most borrowers who have problems are those who have committed to a loan without fully understanding the terms and conditions.
As previously mentioned, there are many providers to choose from so it can pay to research your options fully. Whilst we believe that most providers are reputable, there are some disreputable providers out there. Again, a little research will help you avoid less than transparent contracts and extortionate rates. We believe some of the most reputable providers include:
- Lloyds Bank
- Funding Circle
Lloyds provide a variety of loan options from £0 - £25m+ turnover. Arrangement fees relate to the value of the loan and interest rates are flexible and set on a case-by-case basis. This will depend on the circumstances of your business, including history and annual turnover.
One of the alternative online providers that have grown in popularity since the financial crisis of 2008, Funding Circle provide funding for up to 5 years at a time, making them most suitable, we believe, for well-established SME (Small to Medium Sized Enterprises).
Santander offer loans from £1,000 to £25,000, that can be paid back between 1-5 years. Interest rates range from 7.9% - 12.9% and arrangement fees are set at just £100. Not all Santander loans incur an early repayment fee but this will be determined at the outset and can be negotiable.