InvestorQ : Q: What are the fees and charges which are incurred when taking a business loan?
Ashoka Patkar made post

Q: What are the fees and charges which are incurred when taking a business loan?

Pratik vyas answered.
3 years ago

Like any other loan, there are a number of charges and fees associated with a business loan. Most of the charges are similar to the ones charged in other loans, although there are a few additional ones as well.

Few charges incurred when taking a business loan:

Processing fees: It is also referred to as application fees, which are levied by the lender for processing your loan application. Usually, this covers the basic administration costs, expenses incurred to check the credit history, etc. These fees are non-refundable and are charged as a percentage of loan amounts. The percentage of processing fees differs from lender to lender, varying between 2% - 3% of the loan amount. Processing fees are usually collected at the time of disbursement of loan by most lenders.

Foreclosure charges or pre-payment charges: These are the charges levied by the lender on the borrower, when the borrower repays the entire debt before the loan tenure. The reason for the same is that banks want to dissuade borrowers from reducing their tenure as a long tenure means more money for banks or NBFCs. Hence, if a borrower reduces his/her loan tenure, it means less profit for a lender and hence the pre-payment charge on it.

In 2014, RBI had directed banks to do away with charges on pre-payment of loans which were based on floating rate of interest. Hence, there is no foreclosure penalty levied on term loan with floating rate of interest. However, the new regime does not cover overdraft and working capital loans.

Most lenders prescribe the percentage limit (certain percentage of outstanding principle) to make a pre-payment without charges. A borrower can make a part pre-payment to the limited extent without charges. Any repayment over and above that limit will be charged at a rate fixed by the lender. The percentage of fees varies from lender to lender, which generally ranges from 2% to 5%.

Conversion charges: Lenders provide an option to convert the loan from a fixed interest rate-based loan to a floating interest rate-based loan, or vice versa. Some lenders collect a certain percentage on principal loan outstanding as fees for this process of conversion.

Commitment fees: These charges are levied on the overdraft facility depending on the average utilization of the credit limit. The minimum utilization limit is set by the lender in percentages. Some lenders keep 25% as the utilization limit, some keeps 50%. If the utilization falls below the prescribed limit, then penalties will be charged to the borrower.

Late payment charges: In case of term loan, if there is any delay in making the EMI payment, there will be a penalty for making delayed payment which again varies from lender to lender. If you miss on a deadline, you will be penalized for making the payment after the due date.

Loan cancellation charges: Most of the lenders do not charge on the borrower cancelling the loan. However, you will be charged with the interest for the period (for the period between dates of disbursement of loan to date of cancellation of loan).

Legal fees: Legal fees are not included in the processing or application fees by most of the lender and are collected separately.

Other fees: Apart from the above major charges, there are some miscellaneous charges such as cheque bounce charges, cheque swapping charges, etc. Charges for statement of account, stamp duty and other statutory charges (as per applicable laws of that particular state), etc. are normally levied in business loans.

As you can see, there are multiple charges that are levied on borrowers, for varied reasons. Thus, when you are researching and analysing the various loan options ahead of you, go through the loan documents very carefully. You should know the ins and outs of your loan document like the back of your hand. This is the only way you can avoid facing any unpleasant surprise throughout your loan tenure.