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There can be more to a bank business loan than making interest
and principal payments. Your firm may get a great rate on its
new credit line or term loan but you may cry on the way home
when you discover the hidden fees and charges.
Even seasoned borrowers can be caught off guard. Borrowing costs
can be boosted by thousands of dollars and the effective rate on
the loan increased by many basis points as a result of these
hidden charges.
Here are some of the fees and charges that can increase your
firm’s costs on bank loans:
Commitment fees
Many banks charge commitment fees of ½% - 1% or more to issue a
commitment to lend money. The fee is calculated on the available
credit amount. Commitment fees significantly increase the
effective rate on outstanding loans.
These fees can be negotiated. If your firm has a strong credit
profile or if the competition among banks in your area is
fierce, ask for a lower commitment fee or ask to have it waived.
Non-use fees
These fees may be charged in lieu of or in addition to
commitment fees. Non-use fees usually range from ¼% to ½% of the
unused credit facility. 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 the non-use fee
reduced or waived if your firm has a strong credit profile or if
the banking environment is very competitive.
Restructuring fees
When your firm has reason to restructure an existing loan, you
can expect your bank to charge a restructuring fee for the
privilege. For example, if your company has reason to convert a
short-term loan into a long-term one, it will probably be
charged for this restructure.
These fees can range from ½% to 2% or more plus any bank legal
fees or out-of-pocket expenses. If your firm has been a
long-term bank customer in good standing, you may be able to
negotiate or eliminate the fee. But don’t expect to eliminate
the bank’s attorney fees and out-of-pocket expenses.
Bank attorney fees
Attorney fees usually come into play when the bank uses an
outside law firm. Making matters worst, many outside bank
attorneys require a borrower to hire an outside attorney to
issue an opinion letter covering the transaction.
Usually, only the strongest borrowers in very competitive
banking situations can totally eliminate paying bank attorney
fees. However, if your firm is a valued customer, your bank may
be willing to have these fees capped or reduced. Often banks
have some leverage with their law firms to get a discount.
Appraisal/environmental evaluation 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 appraisal or environment issue.
Like attorney fees, appraisal or environment evaluation fees are
almost always for the account of the borrower. Perhaps the best
result one can expect is to have these fees capped or have the
lender split the amount in some way.
Unanticipated audit expense
Many banks reserve the right to audit borrowers or to send bank
personnel in for inspections. An audit may be required to review
accounting procedures or to monitor collections, inventory or
another aspect of your firm’s operation. Also, some banks
require outside audits by CPA firms in connection with extending
credit. Any of these scenarios can create significant expense
and involve a substantial time commitment for your firm.
Before signing, review your loan agreement carefully to identify
any audit or bank inspection requirement. If your bank requires
an audit or inspection that you did not anticipate, try to get
it eliminated or try to negotiate limits. You may be able to get
a less-stringent requirement or to negotiate a less-expensive
alternative to the audit or inspection required by your bank.
If all else fails, try to get audit or inspection fees capped.
Late charges
Charges for making late payments to your bank are generally in
your control. These charges can be onerous and can add
significantly to your firm’s borrowing cost. It is not unusual
to see banks tack 300 basis points onto a customer’s borrowing
rate for delinquent payments.
While it is worthwhile during the negotiating stage of the loan
to ask for a lower late- payment charge, the best solution is to
try to avoid these charges. If you can, try to get the
late-payment rate knocked down to 75 to 150 basis points above
your borrowing rate.
Expiry of or Failure to Get a Rate-lock
In a stable rate environment, many banks are willing to lock the
rate on fixed-rate credit transactions. Rate-locks protect the
borrower from adverse rate movements prior to closing. In most
cases, rates can be held up to 60 days. Rate-locks are not
uncommon in real estate loans and equipment installment loans.
If your firm is negotiating a fixed-rate loan, try to negotiate
a rate-lock. You may pay loan interest that is a tad higher, but
a locked rate can eliminate an unpleasant interest rate swing.
Once you have locked the rate, try to stay within the holding
period for closing the transaction. Most banks will eagerly and
aggressively pass on rate hikes in a rising rate market, if you
fail to comply.
Many hidden bank fees and charges 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
commitment letter and before you sign the credit 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.
About the author:
George Parker is a Director and Executive Vice President of
Leasing Technologies International, Inc. (“LTI”). Headquartered
in Wilton, CT, LTI is a leasing firm specializing nationally in
equipment financing programs for emerging growth and
later-stage, venture capital backed companies. More information
about LTI is available at: www.ltileasing.com.