The Hidden Cost of Business Finance

There is a reason for the saying “always read the fine print.” Often when seeking finance, the figure people pay the most attention to is the interest rate. To most people this is the defining mark of quality in any finance contract. While it’s certainly one of the things that is addressed when negotiating finance on behalf of my clients, it is not the only factor in determining the overall value of a loan.

Interest Rates – why are they so important?

The reason that interest rates are commonly a primary focus in finance is the fact that every finance contract has one, and at first glance the numbers are easily measured against each other. A small difference in interest rates on a large loan will make all the difference in the size of the repayments, but it may not be the only factor in the value of the loan.

OK, so what else do I need to consider?

Although the interest rate is important and always needs to be addressed there are many other factors to consider. You may want to consider the term of the loan, frequency of repayments, any extra upfront fees as well as ongoing monthly fees. Another factor that may affect the affordability of your loan is whether it is to be secured against an asset or unsecured.

Secured vs Unsecured

Many lenders will offer the option of securing a loan against an asset to allow you to borrow a larger amount or obtain a better rate. The benefit of having a secured business loan is that you can often get a better rate. The downside is that you have the risk of losing your assets if you cannot afford to repay the loan. Unsecured loans however will come with lower loan amounts and higher rates as they are considered more of a risk by the lender.

Hidden Fees to look out for

Many loans have a plethora of hidden fees, some charged as a one-off upfront fee, and others as a recurring monthly fee.

Here is a summary of the hidden fees that may be included in a finance contract:

  • Application fee

    putting together an application costs the lender time, and they will often pass these costs on in the way of an application fee. May also be known as establishment fee or start-up fee.

  • Origination fee

    An origination fee is similar to an application fee in that the lender is trying to recover the costs of packaging a loan offer. This could be a flat fee or a percentage of your loan.

  • Documentation fee

    This is the fee for creating the documents related to your loan. This may include the cost of retrieving official or government documents.

  • Maintenance fees

    Some lenders may charge a fee to cover the administrative costs of keeping the loan open. This can add up to a considerable cost over the life of the loan.

  • Banking and payment fees

    These could include fees incurred from direct debits, late payment fees or dishonour fees

  • Prepayment/break fees

    Also known as exit fees, settlement fees or early termination fees, these are charged when you pay your loan early. Some lenders will charge you for paying off the loan early to counter the money they will be losing on interest over the term of your loan.

  • Fixed rate lock in fee

    A lender may charge a fee to lock the loan in at a certain interest rate to protect the loan from market fluctuations. This will also keep the interest rate at a higher rate if overall rate goes down.

  • External fees

    Also known as third party fees, these are incurred when a lender chooses to pass on costs associated with procuring the loan, such as appraisals.

Case Study

Let’s take a closer look and compare two different loans:

  • Finance company A charges an annual interest rate of 12% with no other fees at all associated with the finance contract.
  • Finance company B charges an interest rate of 10.5% but with a $600 upfront documentation fee, a $900 admin fee and $30 monthly recurring fee.

In the following table we compare two loans from these companies’ using a loan amount of $10,000 and $100,000

Company A

Company B Company A

Company B

Loan Amount

10,000

10,000 100,000

100,000

Interest Rate

12%pa

10.5%pa 12%pa

10.5%pa

Loan Term

5 years

5 years 10 years

10 years

Monthly Direct Debit Fee

0

1.99 0

1.99

Monthly Account Maintenance Fee

0

30 0

30

Upfront Documentation Fee

0

600 0

600

Upfront Administration Fee

0

900 0

900

Principle

10,000

11,500 100,000

101,500

Monthly Repayment

223

248 1,435

1,370

Total Repayable

13,380

14,196 172,200

164,400

Total Recurring Fees Charged

0

1919.4 0

3838.8

Grand Total Paid

13,380

16,115.4 172,200

168,238.8

Difference

2,735.4

3,961.2

 

As you can see, for the smaller loan amount, the loan from company A is better, because although it has a higher interest rate the lack of extra fees make it better value overall. With this in mind, I’m sure you can see the contract with the higher rate would be a better option for the client in this scenario.

However, for the larger loan, the higher fees are negated by the lower overall interest rate.

Let us do the walking for you  

I’m sure you can see now why it is important to have an expert fully understand the ins and outs of any finance contract you enter into. Just because you get the best interest rate doesn’t necessarily mean you have the best deal.

At Cash.com.au we have worked for various banks, finance companies, and fintechs.  This ensures we know their respective credit policies which allows us to approach the right lender to secure the funding you need to grow your business.

If you want to get in touch with us to learn more or discuss your business requirements please contact our Broker Manager Ben Murphy ben@cash.com.au or call on 0408815839

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