When applying for a business loan, many small and medium-sized enterprises (SMEs) focus on the interest rate, but that’s only part of the cost. Fees and hidden charges can significantly increase the total cost of borrowing, especially if they’re not clearly disclosed or understood upfront.
In this article, we break down the most common fees associated with SME loans in Singapore, how to spot hidden costs, and how to compare loan offers effectively.
Why Understanding Fees Matters
Even a loan with a low advertised interest rate can become expensive if it includes:
- High processing or administrative fees
- Early repayment penalties
- Compounding interest structures
- Unclear terms on late payments or renewals
According to Enterprise Singapore, while the Enterprise Financing Scheme (EFS) offers government-backed loans through participating financial institutions, the actual terms, including fees, are determined by the lender and subject to their risk assessment.
Common Fees in SME Lending
Here are the most typical fees you may encounter:
1. Processing or Origination Fee
- Charged upfront when the loan is approved
- Typically ranges from 1% to 3% of the loan amount
- May be deducted from the disbursed amount
2. Administrative or Service Fees
- Ongoing monthly or annual charges for managing the loan
- Can be fixed or percentage-based
3. Late Payment Fees
- Applied when you miss a scheduled repayment
- Can be a flat fee or a percentage of the overdue amount
4. Early Repayment or Prepayment Penalty
- Charged if you repay the loan before the end of the term
- Intended to compensate the lender for lost interest income
5. Legal and Documentation Fees
- Covers the cost of preparing loan agreements and legal checks
- May be charged separately or bundled into the processing fee
6. Drawdown Fees
- Charged each time you access funds from a revolving credit facility
Hidden Costs to Watch Out For
Some costs may not be clearly labeled as “fees” but still affect your total repayment:
- Flat vs. Effective Interest Rate (EIR)
A flat rate may appear lower but doesn’t reflect the true cost of borrowing. Always compare using the EIR, which includes fees and compounding effects.
- Compounding Interest
Some loans calculate interest on the outstanding balance daily or monthly, increasing the total cost.
- Bundled Insurance Products
Some lenders may require you to purchase credit insurance or business protection plans as a condition for approval.
How to Protect Your Business
- ✅ Ask for a full fee breakdownbefore signing any agreement
- ✅ Compare EIRs, not just flat or advertised rates
- ✅ Read the fine print,especially clauses on early repayment, defaults, and renewals
- ✅Use government resources like GoBusiness e-Adviser to compare options transparently
- ✅ Consult a financial advisoror SME Centre if unsure
Conclusion: Transparency Is Key to Smart Borrowing
Understanding the full cost of a loan, including fees and hidden charges, is essential to making informed financial decisions. By asking the right questions and comparing offers carefully, SME owners can avoid surprises and choose financing that truly supports their business goals.
