Getting a Business Loan? Watch Out For This Fee
Often, getting a loan can be the best way to help infuse cash into your business in order to create growth or expansion in your operation.
There are many different sources of financing for a business to to pursue, but as with most financial products, one of the largest pitfalls when obtaining a business loans is hidden in the fees that some financial institutions may charge for these products.
When you’re in the market for a business loan that you don’t let your need for cash overcome your common sense. Sometimes the promise of a quick cash infusion makes people turn a blind eye to fees, but these fees can quickly eat up any potential profit your cash infusion will generate, making the entire loan a non-starter.
In particular, one fee that you really need to keep an eye out for are origination fees. If you ask a lender about what types of fees they’re going to assess on a loan and the topic of origination fees comes up, it should throw up a red flag for you immediately.
So, what is an Origination Fee?
These fees are hidden under many different labels. Sometimes a lender will call it a service or a closing fee, but in reality, any fee that is charged simply for the act of lending you the money is really an origination fee. What some people don’t realize is how expensive these types of fees can get: in certain cases, they may climb as high as 6%.
Where to Save Money on Business Loans
Always try to calculate how much a loan costs you over the time that you have it for. For instance, if you foresee paying back a loan very quickly, a higher interest rate may not cost you nearly as much as a high origination fee. The origination fee will be assessed to your loan immediately, but with annual interest, especially if you have no penalties for early repayment, you will only pay for the days between when you start the loan and clear it with the institution.
Don’t Forget Other Products That May Hide Origination Fees
Start-ups and sole proprietors may try to obtain a personal loan instead of traditional business financing during the early days of a business. Origination fees can hide here as well. Assess any lending product the same way you would a business loan.
Alternative Financing Sources
Sometimes, neither a business nor a personal loan is a possibility for financing your business. In these situations, you may need to consider alternative sources of funding including personal credit cards, crowdfunding, or loans from friends or family members. Crowdfunding can be an effective solution, but does take considerable creativity and marketing prowess in order to encourage donors to contribute. Credit card financing can be effective, as long as you don’t allow a balance to accumulate and start to suffer from the high interest rates most card providers charge.
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