What is a line fee for a business loan?
A line fee is a fee you pay for a bank to keep credit available for you to use. This could be a Line of Credit (LOC), term loan, overdraft or other credit facility.
While you only pay interest on the balance of a loan, you’re charge a line fee which is based on the limit of the loan.
This fee is payable monthly, quarterly or annually until the facility is closed.
How much is a line fee?
The line fee will vary depending on the type of credit, the lender and the security that you provide.
It roughly equates to the bank’s cost of capital for making this facility available to you.
As a general rule:
- Residential security: Typically 0.3% to 1.0% of the loan limit per annum.
- Commercial security: Typically 1.0% to 2.0% of the loan limit per annum.
So for a $200,000 limit, you could be paying $2,000 a month on your limit even if you only drawn down $50,000 over a period of 6 months!
There are also transaction fees which vary between lenders but some lenders offer a certain number of fee-free transactions per months.
Check out the business line of credit page for more information on other associated fees.
By building a strong case with the right lender, we may be able to save you thousands over the life of your loan.
Why am I charged a line of credit fee?
A line fee only applies to commercial or business loans, most regularly a line of credit or overdraft.
It doesn’t apply to residential loans at all!
Because commercial lending is unregulated and business LOC facilities are often larger than residential line of credit facilities, banks charge rates and ongoing fees per the risk profile of your application.
Banks always aim to reduce their level of risk and ensure they can generate a base level of income from the facility.
They do this by charging a monthly account-keeping fee as a percentage of the LOC limit rather than a fee based on the limit of the facility.
The reason that banks do this is that they need to set aside capital in case a loan goes bad.
This is the same for a loan that is fully drawn and one that is unused.
If a customer doesn’t use their loan then the bank still has this cost but they do not receive any interest income.
The line fee ensures that banks don’t make a loss in this situation.
How can I avoid it?
If you need a line of credit facility to manage your cash flow or embark on the next growth stage of your business, you may be able to avoid a line fee.
By using a residential property as security as opposed to commercial real estate, we may be able to get you approved for a residential LOC as a home loan.
That means you won’t be charged a line fee!
The other exception to this rule is if you own a hobby farm.
You may be generating a level of income from your property, but as long as you stay within the bank’s allowable thresholds, the property may be assessed as residential property rather than a commercial farm.
In this way you can lend against the value of the property, apply for a LOC and avoid a line fee.
Getting a residential line of credit facility comes down to how we present your application to the bank.
Please call us on 1300 889 743 or fill in our free assessment form to discover what options are available to you.
Developers commonly feel the sting of line fees
For example, Tim is a developer and he gets approved for a $5 million construction loan to build a block of units.
Due to miscommunication with contractors, there are significant delays with starting the project and he only draws down $400,000 for the first 6 months of the loan.
The facility is drawn down over the remaining term until the project is completed.
However, the bank is required to allocate the full $5 million in capital from day one.
Unlike a fully drawn development loan, the line of credit isn’t generating an income to the bank so this is the reason the line is applied.
Paying upwards of $50,000 a month can really eat into your cash flow!
Ask us about line fees
A business line of credit can be a great cash flow management tool but you can maximise your savings by negotiating the line fee and setting an appropriate limit for your credit facilities.
Whether you’re a developer or a business owner, line of credit facilities are offered by a number of lenders.
However, there can be huge differences in the line fee and other ongoing costs.
Call us on 1300 889 743 or fill in our free assessment form to discover how we can help you with your business finance needs.