Over the last few weeks, we’ve walked through the different lending paths available to you to get the funding you need to either start or grow your business. Now that you know what each path is, how to qualify, and the pros and cons of each, it’s time to talk about cost.
Again, credit based funding consists of unsecured credit lines that you can use to fund your business. As you probably already know, there is an interest rate associated with all lines of credit, though there may be an introductory offer of 0% for the first few months. Some credit lines also have an annual fee. Not all lenders charge an annual fee but some do to account for the benefits associated with a particular credit line. There may also be balance transfer fees since you have the ability to transfer balances between credit lines. One of the perks with that is if you already have an existing balance on another credit line, you can transfer it to the new credit line with a 0% interest rate to save money. Balance transfer fees usually range between 3-5%. Credit lines also give you the ability to get a cash advance if needed but it’s best to stay away from going that route because the fees can be extremely high. The great thing about credit cards is you can use them around the world however, you will likely pay a foreign transaction fee starting at 1% and higher depending on the lender. Another cost to keep in mind is late fees. It’s always important to pay your balance on time because if you don’t, you’re going to pay a fee of $25-$50. You also may acquire a fee if you go over the pre-set limit on your credit line. If you need more money than your credit line allows, you can simply request a limit increase. I actually recommend requesting an increase every 6-12 months because it increases your buying power and helps build up your credit. The higher your credit line, the more credible you look as a business. One last fee to think about is returned payment fees. You always want to make sure that you have funds available to pay your balance because if the payment does not go through, you will receive a returned payment fee as well as a late fee from your credit card issuer.
When it comes to revenue based funding, keep in mind that we are talking about products such as revenue term loans, merchant cash advances, factoring loans, purchase order financing, etc. The costs will vary for each product and each lender. Generally speaking though, there are some common fees that you may be charged with revenue based funding. The first is an origination fee that the lender will charge you for originating the loan. The second is an administration fee that is charged for issuing the loan. Sometimes the admin fee is added to the loan while some lenders require it to be paid upfront. Another fee that might be charged is a maintenance fee which is similar to the annual fee that you see in credit based funding. The maintenance fee is very lender and product-specific so you want to make sure you read the fine print and ask all the right questions. There may also be a wire fee which can range from $25-$50 depending on the bank. You will also pay interest fees which is sort of a given considering that banks are not a non-profit organization and don’t work for free.
Asset Based Funding, again, is any type of funding that involves a transaction where collateral is considered as a part of the transaction, such as real estate loans, equipment financing, and stock loans. Each of these loans is very different so the costs associated with each will be different as well.
In real estate, one of the first fees you will have is an appraisal fee to have an appraisal done of your property to show proof of the value. You will also pay for a home inspection fee which protects the borrower from purchasing a house with issues and protects the lender from investing in a property with issues that an appraiser may not be trained to look for. You may also pay a pest inspection fee to ensure that the home has no pest-related defects. Another fee you will pay is an application/underwriting fee which comes with reviewing your mortgage loan application. A survey fee will be charged to assess the property for any boundary lines, gas lines, roads, walls, easements, encroachments, and improvements on the property. There are also credit report fees you pay when a lender pulls your credit report. There may also be Attorney, closing and settlement/documentation, and prep fees. If you’ve ever purchased real estate before, then you’re familiar with the stacks of papers that you have to sign, and those stacks are prepared by the title company and closing agents and they aren’t free. You will also pay a loan origination fee as well as real estate agent fees. There are also title search fees that cover the cost of the title company to perform a search on the title of the home, as well as a lender’s title fee which covers the cost to insure the title for the lender. In addition, there is also an owner’s title insurance fee that you pay that certifies the title of the property. You will also pay government recording fees when requesting for the title to be updated from the seller to the purchaser. You will pay a transfer taxes fee which is a government charge based on the amount of the mortgage and the purchase price. While some require that you pay your taxes in advance, you may also see escrow property taxes. A few other costs to think about are prepaid daily interest charges which is the amount of prorated interest that will accrue on the mortgage between the settlement date and the beginning of the first full month of your mortgage. Flood determination and monitoring fees will need to be paid to the company that determines whether a property is a flood zone and will continue to monitor the property as flood maps change. There may also be mortgage insurance fees depending on your Loan to Value (LTV) of the transaction. Generally, if you put 20% or more down, the lender won’t require the mortgage insurance fee. There will also be interest fees, of course, as well as property tax fees. There may also be a rate lock fee to lock in the rate that the lender offers you and then depending on the location of your home, you may also pay HOA (Homeowners Association) fees.
Aside from real estate transactions, you will also have fees with equipment transactions such as appraisal fees, interest fees, inspection fees, credit report fees, origination fees, and of course, taxes. You may also have to pay for title filing fees depending on the equipment and size of the transaction. When it comes to stock loans, the only fees you will need to pay are administrative and origination fees.
Now, there are some ways to save money on fees and I want to be sure to share those with you as well. Most people don’t realize all of the fees that are associated with a particular funding transaction, especially in real estate. But, it’s important that you pay attention throughout the transaction process and ask the right questions so you can potentially save yourself some money. These tips that I’m sharing will be general so that they cover all 3 lending paths we’ve talked about.
The first thing to keep in mind is that you definitely want to make all of your payments on time so you don’t have to pay any late fees. These late fees are a huge profit maker for lenders. Another thing that saves you money is choosing who you want to use for things like home or pest inspections, title fees, and insurance, survey fees, settlement fees, etc. Most borrowers don’t realize that they actually get to choose who to use and they just go along with whoever the lender recommends but you do have the option to compare rates and choose the best and preferred option based on your needs. That being said, the one thing the lender will NOT allow you to do is get involved in the appraisal. While you’re shopping around and comparing options, keep in mind that while you want a good price, you get what you pay for so be sure that you will receive great service as well. Always make sure that you read everything and understand what the fees are. You may have some lenders who try to throw other fees in there and if you aren’t engaged and paying attention, you could be taken advantage of. If a lender is throwing in a fee that isn’t mentioned in this blog, it may be time to consider another lender. Another tip is to ask for seller contribution which could save you thousands of dollars because they will be helping with closing costs and may even pay some of the fees mentioned here. They may even offer seller financing where the seller will carry a small percentage of the loan as a second lien to help the borrower with the transaction. You can also consider No Closing Cost Mortgage which will save you money on upfront fees however, some lenders will just recoup those costs on the interest rate being charged so that’s something to keep a lookout for. Another thing that many might not know is that you can save money by signing the loan document near the end of the month. It will save you hundreds or thousands of dollars on interest fees. One last tip is to ask the bank for discounts or rebates associated with your loan. Most people don’t even know that you can do a rate buy down with some transactions where you can actually purchase a lower interest rate. This may increase the closing costs or upfront money but it will save you money in the long run. You can also choose to make your payments weekly or bi-weekly instead of monthly which will save you money as well. You can visit 3pathsoflending.com to receive a bonus tool which is a calculator that shows you how much you can save on interest by paying your payment weekly or bi-weekly.
At Pennington Consulting Group, we work with you, the borrower, and our loyalty is with you. We are experts in the industry and make it our mission to help you reach your goals. We always recommend choosing to work with people who only have your best interests in mind and that’s why we want you to be aware of the fees associated with each lending path and how you can potentially save money now and in the long run.
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