Commercial loan rates: Hidden fees

Here, we identify four of the most common fees 'hidden' in the small print of a commercial loan agreement that can sting your company in the long run.

When securing finance, whether from ‘old-school’ alternative finance providers or modern P2P players, many SMEs fail to check the small print which often contains extra charges that are not presented upfront.

These hidden costs can be one-offs or recurring. This lack of transparency can prove very expensive, affecting a company’s financial stability with unexpected increases to capital and operational expenditure.

The arrangement fee

This one-off admin fee is charged at the start of the contract and covers the costs associated with arranging the finance. The precise amount varies, anywhere from 1 per cent to 10 per cent of the total loan, which can often be a substantial sum, and one you’d likely prefer to keep.

This fee is very common and is almost always present in a deal. Occasionally it’s forgotten for the small deals, but never assume that it will be; if there’s money to be made, an arrangement fee will be added.

Survey or audit charges

Before a financial institution will approve your company for a loan, they evaluate your assets and balance sheets to assess whether or not you qualify. This fee is not common, but some businesses consider it best practice, as it ensures that they understand the risk they are taking on. The cost for this varies across lenders and, given that audits take place quarterly, can present a recurring expense every three months that you may not have budgeted for.

The take-on fee (also known as retro commission)

Invoice finance can help your company improve its cash flow in times of delayed or late customer payment. Your business will essentially sell its invoices to the loan provider. The loan provider will provide finance for a percentage of any outstanding invoice value and assume responsibility of the unpaid invoice. They may, however, charge you a fee for taking-on each unpaid invoice they assume responsibility for, which can be up to 2 per cent of the total invoice value. This fee is universal in the alternative finance world; most companies will have this in place if you are looking to use an invoice finance facility.

Trust account charges

Another hidden fee common in invoice finance is the trust account charge. Every time an outstanding invoice is paid into a money lender’s account, a service charge is levied before any remaining balance is transferred to you. This can be up to 0.2 per cent of the amount received and can accrue quickly; the greater your company’s backlog of unpaid invoices, the more expensive the financial assistance. This charge is only ever an issue if you choose to have a confidential invoice finance facility, where it is considered a default charge.

Case study

One such example of hidden fees in action is a printing firm which had been granted a funding line of £200,000 with a discount fee of 1.5 per cent above the base rate (0.5 per cent).

The company thought its fees would total £75,000 over three years. The money would help them fund their sudden growth through taking on a big client.

This was, unfortunately, too good to be true! Their loan facility contained several hidden fees:

1. Arrangement fee: 5 per cent

2. Survey/audit fee: £500 every three months

3. Trust account charge: 0.2 per cent of paid invoices

4.Take/on fee: 2 per cent of invoice value

This meant:

1. They paid £10,000 as an arrangement fee and £4,000 as a take-on fee for invoices they brought on board

2. Every quarter they paid £500, adding up to £6,000 over the three years

3. They paid £2,550 for using the trust account their invoices were collected through.

The true cost of the loan was £97,550: a massive 30 per cent increase on what they thought they’d be paying.

Always read the fine print

It’s easy to be swayed by attractive base rates so it’s imperative you’re absolutely sure you understand what you’ll be paying for and when. Lenders know they are pitching for your business so will try to make their deal look as attractive as possible by hiding fees in the small print. It’s an unfortunate practice, but they’ve every interest in making sure that you don’t actually read it.

The only way to ensure your business isn’t hit with unexpected costs leading to operational difficulties is to make sure you read everything thoroughly. However, if you do feel like you’ve been caught out you can speak to the Financial Ombudsman.

Raf Hussain is business development manager at Nucleus Commercial Finance.

Further reading on business finance

Ben Lobel

Delphine Hintz

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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