Understanding Business Loan Interest Rates, Fees and Charges

Irrespective of the size of your business, you will require a business loan to carry out different activities. A business loan will give you the much-needed capital to expand/grow your business, buy new machinery, invest in automation technologies and more.

Every business loan, whether short-term or long-term, carries an interest charge. Lenders charge interest as a mode of fee for offering funds to borrowers. While some factors may get you a reduced interest rate, you cannot get away with paying these charges.

Listed below are the details about interest rates and other charges that are usually associated with a business loan. Being aware of these charges will help you avoid unnecessary surprises later on.

Interest Rates

This is the most common charge you will come across when you apply for a business loan. The interest rates are a form of fee charged by the lender for providing you with funds. Your credit score, tenure of loan, amount of loan and other factors affect the interest rates charged by the borrowers.

Business loan interest rates can be anywhere between 9.75 and 30% per year, depending on the nature of the lender. Banks and traditional financial institutions may charge lower interest rates than individual, private money lenders and fintech companies. Interest rates may be charged monthly or yearly.

Processing Fees

As the name indicates, this refers to the fee charged by the lenders for processing or handling your loan application. Lenders charge this for all the steps they do right from the time of getting your loan application to the time of the final loan disbursal.

Processing fee is charged once at the time of loan disbursal. The lenders deduct this charge from the final approved loan amount and then credit the remaining amount to the borrower’s account. 

Different lenders charge different processing charges based on the credit status of the borrowers. Some charge around 2% of the loan amount as processing, while some may charge even 4 or 5% as processing charges.

Late Payment Charges

Borrowers have to pay their loan repayments within the specified due date every month. Failure to do so will attract late payment charges. Usually, when borrowers don’t have enough funds in their accounts, they tend to miss their loan repayments. Lenders charge high charges as late payment fees for the same.

Prepayment Fee

As a borrower, you may require a business loan to meet a particular requirement. You may have opted for a loan for a specified term. However, when your cash inflow starts to improve, you may want to pay off your loans before the scheduled time and stay debt-free.

However, please be informed that lenders may charge you an amount in the name of a prepayment fee or foreclosure fee. These prepayment fees may differ based on the type of loan and the nature of lenders. Some lenders may charge you a prepayment fee even if you close a part of your loan before the due date.

Online convenience charges

Today, most lenders have moved to online sources for loan application and disbursal processes. Once all the documentations are verified and approved, lenders usually give borrowers a unique ID and password. 

Hence, they charge an amount in the name of online convenience charges for these services. It is better to know the percentages of these charges before looking for online lenders for your financial requirements.

Documentation Fee

When applying for a business loan, borrowers have to submit the required documents to lenders. Lenders need to check these documents, get back to borrowers for corrections, if any, send them to further processes if everything is alright and handle the documents properly. 

They charge a documentation fee for these services. These charges are different for different types of lenders. The nature of the loan also plays a big role in calculating these charges. It can either be a fixed charge, or a percentage of the total loan amount.

We have discussed most of the major charges that are associated with business loans in the above sections. However, there could be some of these additional charges as well when you apply for business loans:

• Bounce charges – when the cheque issued by borrowers for loan repayments bounces for lack of funds or other reasons
• Stamp duty – based on the nature of loan, geographical jurisdictions and other factors.
• Cash collection charges – applicable when borrowers pay loan repayments in cash to the collection agents appointed by lenders
• Cash deposit charges – applicable when borrowers make loan repayments in the form of cash deposits in any branch
• PG facility charges – applicable when borrowers opt to make loan payments through specific payment gateways
• Annual maintenance charges – applicable for some flexi-loans and flexi-hybrid loans based on the terms and conditions of the lenders
• Switch fees – when borrowers want to switch from one lender to another; a certain percentage of the loan amount may be charged for the same
• Broken period interest charges – applicable as per lenders’ terms where the period between the loan disbursal and the first charge of EMI is more than 30 days or less than 30 days

Bottom Line

In conclusion, navigating through the various interest rates, fees, and charges of business loans can feel overwhelming, but understanding these aspects is crucial to making informed financial decisions. With TallyCapital, not only do you get access to tailored business loans that suit your needs, but our transparent approach ensures there are no hidden costs. Plus, with our expert guidance, we help you secure the most favorable terms, so you can focus on growing your business without the stress of complicated loan structures. Let TallyCapital be your partner in building a strong financial foundation for your business.