Business finance fees explained
Most small businesses will require some form of business finance at some point. And while getting funding for your business may be the right thing to do, it is unlikely to be free of charge.
The people lending you money are in business too, and they need to make a profit. So, different lenders will charge a variety of fees for the various products they offer you. Charges may come in the form of arrangement fees for business loans, annual fees for credit cards or interest charges, which can be applied to pretty much any type of business financing.
What is a loan fee?
A loan fee is any charge associated with a business loan - or any type of borrowing - that does not include the interest rate.
There are many different types of business loans and almost as many types of loan fees that come with them. Examples of common fees include application fees, processing fees, origination fees, overdraft fees, late payment fees, and prepayment fees.
How much does a business loan cost?
Whichever type of loan you choose for your business, what that finance will cost you depends on two things: the fees attached, and the business loan interest rate. You will only know the true cost of your business loan by combining these two things together.
You should also know how to calculate business loan interest. That’s because a low-interest business loan might end up costing more overall if you are borrowing the money over a longer period of time, even if your monthly payments are lower. Conversely, short term commercial loan rates are likely to be higher, but the overall cost could be lower.
Business loan rates in the UK vary depending on the lender, the type of loan, how much you want to borrow, and for how long. Your credit score is also an important factor in this (see below).
Another thing to keep in mind is whether your business loan interest is tax-deductible. This might help you to reduce your overall business finance costs, even if a loan seems expensive. However, while interest on business loans normally are deductible, make sure this applies to the loans you are taking out. If you’re unsure, check with your lender or your accountant.
What fees are charged when you apply for a small business loan?
There are three main types of fees that lenders may charge when you apply for a small business loan, and sometimes they are interchangeable. These are application fees; origination fees; and processing fees.
An application fee is what most lenders charge when you first apply for a loan. Often these are non-refundable even if your application is denied. Some lenders call an application fee an origination fee. However, on the whole, an origination fee is different because it is only payable once an application is approved. The average loan origination fee is between 0.5% and 5% of the loan amount.
A processing fee is a very specific type of application fee, paid to the lender to cover particular expenses like arranging documents or carrying out credit checks.
What other types of business loan fees might be charged?
There are, of course, other kinds of business loan fees you might end up saddled with, besides those listed above.
If you are using a third party to arrange your loan, you may have to pay a broker fee. Another payment that some lenders insist on is a bank transfer or wire fee if they are being charged to send the money to your account.
Once the loan has been finalised, you may also have to pay fees for late or missed payments, or even for paying back the loan amount early. As always, check with your lender before agreeing to a deal.
In addition to these one-off fees, you will of course also be charged an interest rate. Interest rates on business loans can be fixed or variable. With fixed interest rates, the monthly payments will be the same throughout the term of your loan. If you opt for a variable rate loan, interest - and therefore monthly payments - could go up or down.
If your loan is in fact a mortgage, rather than another type of business loan, you should familiarise yourself with how mortgage interest works. With this type of financing, a lender might offer an initial rate - also known as an initial term cost. This initial rate will last for anything from one month to 10 years, but once the period is over, you will start paying what is known as the Standard Variable Rate (SVR), which is almost always higher.
You should also find out how much mortgage lender fees might be, as these can be more expensive than equivalent fees for a normal business loan.
What is the average interest rate on a business loan in the UK?
The interest rate your business is offered will depend upon its current circumstances and how it handles credit. It will also depend upon the type of loan you take out.
Data from Nimblefins, the finance research and analysis website, suggest that UK businesses can expect to pay the following rates:
|Loan type||Typical interest rates||Other fees and charges|
|Business overdraft||7% to 11% a year||Overdraft fees may be a set amount or a percentage of the total amount borrowed.|
|Business credit card||20% to 50% APR||Late payment fees are the ones to watch. Your provider may also charge an annual or monthly fee for using the card. And look out for foreign transaction fees.|
|Unsecured business loan||7% to 20% APR||Late payment fees and early repayment fees. You may also be charged an arrangement fee.|
|Secured business loan||4% to 20% APR||Late payment fees and early repayment fees. You may also be charged an arrangement fee.|
|Asset finance||From 2.6% APR||You might be charged an arrangement fee. You might also need to take out separate insurance to cover damage to or loss of the asset.|
|Invoice finance||Varies||Many lenders will charge annual fees as well as collection fees if they collect the money on your behalf.|
|Start-up loan||6% APR||None|
Which loan is best for business?
The type of loan that's best for your business will depend on your current circumstances. This not only includes the financial health and credit score of your business, but it's also dictated by the amount you want to borrow, for how long you need the loan, and what you plan to spend the money on.
When comparing business loans, you should always look for a lender that specialises in offering finance to businesses in your position. This means considering smaller challenger banks as well as the well-known traditional ones. Those smaller online lenders might offer better rates and save you money over the life of the loan.
How can a small business get a loan from a bank in the UK?
If you want to get a small business loan from a bank, it's worth getting in touch with the one you use for your business bank account. This is because you already have a relationship with them and they may be more receptive than a lender you've never used before.
If your bank offers you a loan, you should then compare what's on offer elsewhere to see if you can get lower interest rates or better lending terms, such as a longer repayment period or a higher loan amount. When comparing loans, remember to consider the amount you'll pay overall alongside the monthly repayments.
Although lower repayments might seem appealing, you may end up paying a lot more overall if the loan takes longer to repay.
What is a business credit score?
A business credit score is how a lender measures your creditworthiness as a business. Ratings are based on a number of factors and are used to decide how risky an investment a loan would be from a lender’s point of view.
Generally, there are five levels of risk, from category A+ to category D. Typical business loan terms and rates will be based on these ratings. A lender will offer a better deal to a borrower rated as A+ than to one rated as A, and so on.
What are Bionic’s business loan rates?
Bionic’s business finance team can help you understand everything about business loans, and make sure you find the deal that’s right for you.
Our extensive knowledge of the market means we will also get the lowest rate for the type of borrowing you require.
Typically, if you are looking for an unsecured business loan over five years, we can get you a rate of around 7% for a business with an A+ credit rating. This might climb to as high as 21.5% for a D-rated borrower.
For a secured loan over five years or more, rates with Bionic typically range from 2% to 15%, depending on your credit rating.
To find out what rate we can get for your business, get in touch with us today.