This is a user generated content for MyStory, a YourStory initiative to enable its community to contribute and have their voices heard. The views and writings here reflect that of the author and not of YourStory.

What Types Of Fees Are Associated With Business Loans?

What Types Of Fees Are Associated With Business Loans?

Wednesday January 04, 2017,

5 min Read


Be it starting up a new business or expanding an existing business, timely finance and managing them rightly is the key for success of any business. Choosing the perfect financing or credit option is a vital component for your business to grow in each stage. There are various types of business loans available today; all are little different from each other based on the application of funds. Charges and fees associated with them accordingly vary. Searching for the perfect financing deal for your business itself is a difficult and daunting task. One must be educated enough to zero down on the best financing deal. It’s essential to know all the charges and fees mentioned in the fine print before you shop for business loans. Knowing these fees in detail will help you figure out the exact cost of the loan that you are thinking to avail.

Before we understand the fees and charges, it’s important to know the types of business loans available in brief. Business loans can be of secured as well as unsecured (without any collateral) and can be long term as well as short term in nature. In a broader sense, here are three types of loans:

Term Loan: Basically, term loans are provided for the requirement of acquiring long-term assets like land and building, machinery, infrastructure, renovating a business setup or purchasing a vehicle for business purpose etc. Interest rate offered are either floating or fixed. Term loans follow a fixed repayment schedule. This loan is based on specific tenure and total amount of the loan is disbursed in full. These are normally long term in nature, tenure of the loan ranges from 3- 10 years

Working Capital loan: Basically, these short term loans that are utilized by borrowers to run their business. It is provided for the purpose of performing day to day operations of your business. Banks and NBFCs provide working capital loans on assessing the specific credit requirement of your business.

Overdraft: This type of business loans are secured loans which are provided based on some collateral such as bank fixed deposits or property. Overdraft facility is provided based on the banking relationship between the borrower and the bank, credit and repayment history of the borrower’s business, etc. Interest is charged only on the utilized amount.

Here are some of the common fees and charges associated with this business loans:

Processing fees: Processing fees are also referred 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 charged as a percentage of loan amounts. 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 of the 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. In 2014, RBI had directed banks to do away with charges on pre-payment of loans which are based on floating rate of interest. Hence, there is no foreclosure penalty levied on term loan with floating rate of interest. However, this 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. 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. Again, 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. 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, 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.

Now that we have understood some of the common fees associated with business loans, it’s easy to compare different loan offers from various lenders. Apart from interest rate and monthly EMI, fees and charges are major components of any loan while comparing the total cost. Though finding the perfect loan is not easy, understanding the cost associated with the loans lessens your work and helps you take an informed decision.