02/06/2015

By Emma Dungey, Head of Operations, Verus360


Look beyond the headline rates offered by many lenders, and you’ll encounter a confusing maze of add-ons, extra fees and hidden charges. It’s no surprise, then, that our research revealed 40% of UK small and medium-sized enterprises (SMEs) are unaware of just how much they’re paying for finance, while a third aren't confident that their provider's costs are fully transparent.

So what are the hidden costs you need to look out for, and how do you spot them?

Here's our handy guide to some of the most common pricing pitfalls. All prices and rates stated are correct as of May 2015.

Arrangement or set-up fees

Arrangement fees (also known as set-up or commitment fees) are commonly charged for different types of business finance.

There are two types: non-refundable and refundable (once you are a customer).

How much will it cost?

These can range between £500 and £10,000, but some lenders charge a percentage of the amount borrowed. One leading bank, for example, charges up to 1.5% of the loan amount.

Fees for everyday services

Many business lenders charge you for everyday administrative services and lenders tend to add a (sometimes significant) margin on to fees from third parties such as banks. These ‘invisible costs’ can include making a transfer, creating a report, extra documentation, personal visits, extending your funding limit — and much more. They can be calculated in different ways (a percentage on the excess or facility limit, or fixed). The risk profile of your business may also affect what you're charged.

How much will it cost?

One major high street bank, for example, charges an account maintenance fee of £5.50 a month, 19p per credit, 23p per bill payment made online or by phone, £5 per bill made in branch, and 80p plus 0.6% of the amount per branch credit.

The factoring and invoice discounting industry has a wide and varied tariff mechanism which allows those lenders to charge additional fees for any and all potential eventualities — thus making the overall facility more costly than would have been originally negotiated.

Fees could include the following: Payment transfer fee (£15-30 per transmission), payment extensions (0.5% to 4% charged against the additional value required above agreed fundable limit), annual review fees, charged either on a fix value basis (eg. upwards of £500) or a percentage against the additional uplift (ranging from 0.5% to 2%), plus various charges for generation of paperwork, visits, surveys and audits.

Breach fees can range from £50 to several thousand pounds, dependent on the severity they judge that breach to be.

Penalty fees (missed payments etc)

If you stray outside of your agreed overdraft limit, even for a very short time, the total amount you pay for your finance could balloon past the costs you see upfront (your core borrowing).

Penalties are commonly charged for unauthorised borrowing.

How much will it cost?

These can be significant and are often hidden — sometimes lenders will just include a generic clause which doesn’t explain rates or charges.

Non-utilisation fees (or monthly or annual ‘minimum fee’)

Some lenders — often those offering factoring or invoice discounting — will charge you for access to finance, even if you don’t use it, to keep the account open.

How much will it cost?

The amount charged depends often on your turnover. For typical SMEs, fees generally start at between £6,000 and £10,000 a year, although they can run to tens of thousands, equivalent to APRs of 10-20% of the facility limit.

Contract/facility review fees

Annual facility reviews are often chargeable, generally within the invoice finance industry.

If you’re a growing business, or one with seasonal peaks and troughs, check if the lender charges for these reviews and work out how much this will cost you over the first year to see if the cost is justified.

How much will it cost?

This is usually an annual event to check your risk profile, and you’ll be charged around £500 to pay for the audit (and a visit if necessary) — but the amount will vary according to the complexity of your company accounts.

Exit fees

It might seem unfair, but some lenders will charge you for closing your account, even if you’re fully paid up — especially if you leave before your contract end date.
How much will it cost?

It depends on how far into your contract you are, if this is fixed term, but as a guide it could be up to 15% of your facility limit.

Top tips

This may sound obvious, but, when considering finance, be sure to read the small print carefully. You’d be surprised at just how many people don’t.

Always ask the lender for a full list of both their standard and ad-hoc tariffs.

Make sure you know your rights, which you can find out from the appropriate regulatory or industry body.

Finally, if you are charged, and you don't think it's fair, challenge the fee. Most lenders have a complaints process, and many can waive or reduce charges if they are deemed to be unjustified.

It’s a confusing landscape, so weigh up your options carefully — and make sure you know what you’re committing to!


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For more expert advice on navigating the confusing landscape of SME finance, register with us to download our free e-book, Exposed: The real cost of business finance.