New loan money is cheap today. At least the interest rates are cheap. Where your company may get nipped, however, is not in the rate. It’s in all the “extras” you pay up front at or shortly after closing. Here’s the low down on all those extra costs and how to eliminate or reduce them.
Application Fees – Some institutions have the nerve to ask for a fee to simply review your request. Unless they have a super-low rate (like some MAC programs), you don’t need them and should look elsewhere.
Points – Watch for application fees that are disguised as points. Some lenders will ask for a non-refundable one-half point up front. That’s still an application fee. True loan points are paid upon the closing of the transaction and not before. Remember that points are negotiable, and many family business owners are getting low-rate loans without points. If your lender says the points are to cover administrative costs, come up with a fixed, reasonable amount of money to reimburse their costs, not a percentage of the loan amount.
Appraisals, valuations, site studies, etc. Each lender has different requirements. Get their requirements and costs up front before submitting your application. Creative commercial bank lenders will often find a way around these costly documents. Securitized mortgage lenders (all those four-letter acronym lenders) have a more difficult time waiving fees, but some are becoming very reasonable.
Legal, documentation and filing fees. Again, ask upfront about these costs and get them in writing with a “not-to-exceed” clause. It’s too easy for a lender to spend $5 to $20 thousand on attorneys and then send you a bill for reimbursement that you didn’t even expect!
Unused commitment fees. Some institutions will try to charge you for money you don’t borrow! Since there are many lenders who wouldn’t do this, don’t stand for it.
Checking balance requirement. If part of your loan deal is that you must keep a certain amount of cash on deposit in your non-interest-bearing checking account, remember that is cash! A $100,000 balance requirement is the same as losing about $5,000 worth of interest each year if you had just invested that money in a money market account. Over a ten or fifteen year mortgage loan, that balance requirement will cost you $50,000 to $75,000 in lost interest income!
Staff costs. Watch for the ongoing paperwork requirements. If you must submit monthly financials or receivables listings, there is a cost in time and payroll.
In short, lenders have become very clever at increasing their bottom-line with non-interest income that comes directly from your pocket. Don’t be lulled into an expensive transaction by an artificially low interest rate. When interviewing prospective lenders, ask about all the costs, not just interest rate.
