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Unanticipated audit expense
Many banks reserve
right to audit borrowers or to send bank personnel in for inspections. An audit may be required to review accounting procedures or to monitor collections, inventory or another aspect of your firm’s operation. Also, some banks require outside audits by CPA firms in connection with extending credit. Any of these scenarios can create significant expense and involve a substantial time commitment for your firm.
Before signing, review your loan agreement carefully to identify any audit or bank inspection requirement. If your bank requires an audit or inspection that you did not anticipate, try to get it eliminated or try to negotiate limits. You may be able to get a less-stringent requirement or to negotiate a less-expensive alternative to audit or inspection required by your bank.
If all else fails, try to get audit or inspection fees capped.
Late charges
Charges for making late payments to your bank are generally in your control. These charges can be onerous and can add significantly to your firm’s borrowing cost. It is not unusual to see banks tack 300 basis points onto a customer’s borrowing rate for delinquent payments.
While it is worthwhile during negotiating stage of loan to ask for a lower late- payment charge, best solution is to try to avoid these charges. If you can, try to get late-payment rate knocked down to 75 to 150 basis points above your borrowing rate.
Expiry of or Failure to Get a Rate-lock
In a stable rate environment, many banks are willing to lock rate on fixed-rate credit transactions. Rate-locks protect borrower from adverse rate movements prior to closing. In most cases, rates can be held up to 60 days. Rate-locks are not uncommon in real estate loans and equipment installment loans.
If your firm is negotiating a fixed-rate loan, try to negotiate a rate-lock. You may pay loan interest that is a tad higher, but a locked rate can eliminate an unpleasant interest rate swing.
Once you have locked rate, try to stay within holding period for closing transaction. Most banks will eagerly and aggressively pass on rate hikes in a rising rate market, if you fail to comply.
Many hidden bank fees and charges can be reduced or eliminated if you plan ahead and are prepared to negotiate. You are in your strongest negotiating position before your bank issues a commitment letter and before you sign credit agreement. Always read commitment letters and loan agreements carefully. Look for hidden fees, hidden charges and unexpected requirements. You can also ask your bank to prepare a separate list highlighting all potential fees and charges.
