Most SME owners would usually zoom in on interest rates quoted when comparing SME loans in Singapore but another area you should look out for are related business loan fees and charges.
It might not be easy to compare apple-to-apple on banks’ interest rates and fees as they are sometimes structured quite differently from each other.
Here are 6 fees and charges you should always look out for:
1. Processing fee / origination fee
This is the most common fee that banks charges on their start up business loan facilities and easiest to compare. It’s usually quoted as a percentage of the principal loan amount. For more mature companies or larger businesses with revenue > S$20M, this fee might be negotiable.
If you’re obtaining a revolving credit line such as overdraft or trade facility, the processing fee percentage would be charged on the approved credit line limit granted.
Typically, processing fees are between 1-3% of the approved loan amount.
The reason why banks charge a processing fee on top of interest (aside from wanting to make more money of course), is because of the labor-intensive process of assessing your loan applications.
The processing fee of the loan is supposed to compensate the labor and time banks take to screen and review your application.
For P2P crowdfunding Singapore platform lenders, their origination fee could be higher at between 4-5% of the loan amount.
Since it’s usually charged as a percentage of loan amount, the higher the business loan amount you undertake, the higher the processing fee in net dollar terms it will be.
2. Annual fee/ account maintenance fee
Some banks levy an annual fee for maintaining your credit facilities with the banks. This is not common for non-revolving term loan facilities that are fully drawn down upon disbursement.
For revolving credit lines such as overdraft and trade finance facilities, banks will usually charge an annual fee if your credit facility is still maintained with them.
Fees could be in the range of $500 to $3000 for most line limits below $1M. As banks will require to spend resources reviewing and monitoring revolving line facilities at least yearly, this fee is to compensate the banks’ resources for the credit review. This fee is usually not applicable to non-revolving business term loan facilities.
3. Credit insurance fee
This fee is paid to third parties credit insurers for certain facilities that requires separate insurance coverage.
A common example would be trade finance credit facility which usually requires the borrower to pay an annual credit insurance fee of between 0.75%-1.5% of the credit line.
Enterprise Singapore, a government agency, provides support on a portion of the credit insurance premium to be paid by SMEs if the credit facility is applied under their Loan Insurance Scheme (LIS).
Some banks facility products might also be bundled with key-man insurance for their term loan facilities. This insurance fee will usually be charged annually throughout the loan tenure period.
4. Legal fees
There’s usually no legal fees involved for simple plain vanilla business loan facilities such as unsecured term loan.
However, for slightly more complex facilities especially secured loans with collateral, there might be legal fees involved which the borrower must bear.
The most common legal fees associated with business financing would be asset based financing such as commercial/industrial property loans or equipment loans.
There are property conveyancing legal fees borrower has to pay to the law firm in the financing bank’s approved panel. Some banks will subsidize a portion of this legal fees on behalf of the borrower.
Legal conveyancing fees usually range between $2500 – $5000, depending on loan size and complexity. Some banks will also request borrowers to pay for property valuation fee which usually costs between $500-$1000.
For secured loans where other assets such as fixed deposits/shares/equipment pledged to banks as collateral for banking facilities, some banks will also require borrower to pay legal fee for filing lodgement charges in ACRA.
5. Early repayment penalty fee
For non-revolving term loans, most banks will charge an early repayment fee if you redeem your loan partially or in full before the loan tenure ends.
This fee is to cover the banks for the loss in interest income if you were to service the loan through the entire repayment period.
If you foresee any possibility that you might redeem loan before the repayment period, it is always good to check what are the respective banks’ early redemption penalty.
Most banks will charge between 2-5% penalty on the principal amount that is redeemed early.
Another thing to take note of is some banks have a practice of charging early redemption penalty on the original principal loan amount instead of the redeemed amount.
E.g. If your original loan amount is $100k at 4 years’ tenure, 2 years later you might decide to redeem the loan.
Assuming the outstanding principal amount is about $60k after 2 years’ time, some banks might charge the redemption penalty percentage based on the original $100K loan amount and not the $60K outstanding amount.
In certain circumstances, you might be better off not repaying the loan as the penalty could be higher than the interest savings.
This is especially so during the tail end of the loan tenure as the interest portion of the loan outstanding is at a minimal.
To avoid such early repayment penalty fees, you can also opt to consider government assisted financing schemes such as the SME Micro Loan or SME Working Capital Loan from Enterprise Singapore. These financing schemes usually does not come with early repayment penalties.
6. Banking fees
If you’re taking a business loan from bank A but servicing the monthly installment through bank B which is your main operating account, do note there might be some banking charges for bank transfer made across different banks.
Also, for SME financing in Singapore, most banks will require you to open a current account with them when accepting their approved business loan.
The purpose of the current account is for loan servicing where you are to effect monthly installment in their account for installment deduction. The loan will also be disbursed into this current account.
Do note some of these current accounts requires you to maintain a monthly minimum balance else there will be fall below balance fee deducted.
Most banks business current accounts require you to maintain minimum daily average balance of about $10K and monthly fall below balance fee ranges from $25-$80.
Most the fees and charges above are spelled out in their facility offer letter. However, most SME owners do not read through the fine print and often misconstrued these as “hidden charges”.
Some bank officers also do not take time to detail clearly all related fees and charges that borrowers should take note of.
You can also consider engaging a business loan consultant to help provide a direct comparison on most banks fees and rates.
It is a good practice to read through the important clauses regarding related fees and charges related to taking up a business loan so you can rightfully factor these fees as part of your borrowing costs on top of interest.