Like everyone else, businesses are feeling the pinch right now. So if you are looking to take out a commercial loan, or are in the process of doing so, you will be anxious to keep the costs down as much as possible.
Apart from interest rates, the main costs of commercial loans include arrangement fees, survey and valuation fees, legal fees, and various types of insurance. So what ways can you find of keeping these costs as low as possible?
• Interest rates – if you shop around on the open market, or use a commercial mortgage broker, rather than going through your bank, you can find the most competitive rates. You won’t get the best deals if your credit record is less than perfect, so try to repair your credit rating as far as possible before applying. If interest rates seem likely to rise, you would ideally want to look for a long-term fixed-rate loan, but these are hard to find at the moment. Some lenders offer commercial loans with a “capped” interest rate, that allows you to benefit from falls in base rates without the rate rising beyond an agreed level. This might be your best option at this time of uncertainty.
• Be very careful of hidden charges. Don’t sign any loan agreement without being very clear what you are signing up to. You may think you have secured a loan at a very competitive rate, but add-on fees may significantly increase what you are actually paying. You should usually expect to pay an initial arrangement fee, but make sure this is not an exorbitant amount to compensate for the low interest rate.
• You will be keen to pay off your business loan as quickly as possible. However, before committing yourself to a loan, check out the lender’s policy on redemption penalties. Try to find a lender who doesn’t charge them – if you can’t, try to negotiate flexibility.
• The tax authorities generally allow you to set payments on commercial loans against tax. But they have to approve the purpose for which you are using the funds. You must check your loan plans in advance with your accountant and if necessary with the tax people – and don’t be tempted to change the use of the funds later. You may risk receiving an unexpected tax demand, which is the last thing you want.
• It may not always be possible to avoid defaulting on payments, or being late, if you have a cash-flow problem over which you have no control. However you must do all you can to avoid this happening. You will almost certainly incur late payment charges and/or an increased interest rate, which will cancel out all your efforts to keep your costs down.
It makes absolutely no sense to pay more than necessary for commercial loans. The idea is to improve your business, not to run it down. These are some suggestions for doing this – but first and foremost it’s about prudence and common sense. Whatever charges you are faced with – such as insurance premiums – remember it’s a competitive market and look around to see if you can find a better deal elsewhere.