Personal Savings

Savings are easy to tap and involve no paperwork.

The negatives: if you use money in your business, it eats into your safety reserve and is no longer there for emergencies. It diverts funds from a very low risk investment to a high one.

Whole-Life Insurance

Whole life policies accumulate tax-deferred cash value that you can tap for your business. But only way you can tap this cash without paying taxes is to borrow against your policy. As long as you keep your policy intact and pay premiums when due, loans remain tax-free.

The negatives: you will be converting a low risk investment into a high one; if you decide to terminate your policy or if you default on repaying your loan, taxes will be due on all cash value accumulated under policy; if you die before your loan is repaid, any distributions to your beneficiaries will be reduced by amount of your outstanding loan.

A Loan from Your 401-K Plan

You can borrow up to $ 50,000 of money you have saved under many 401-K plans. There are no credit checks. Interest is usually a percentage point or two above prime rate and interest that you pay back to plan will be tax-deferred to plan. Most loans are repayable out of salary deductions over five years.

The negatives: you will have less money invested toward retirement; dollars used to repay loan will be after-tax dollars withheld from your paycheck; if you fail to repay loan, IRS considers your failure a premature distribution -- you will be charged taxes on borrowed amount plus you may be assessed a 10% early-withdrawal penalty.

A Home-Equity Loan

These loans do require that you apply and be reasonably credit worthy. You generally can borrow up to 80% or 90% of equity value of your home. Interest on these loans is generally tax-deductible.

Even seasoned borrowers can be caught off guard. Borrowing costs can be boosted by thousands of dollars and effective rate on loan increased by many basis points as a result of these hidden charges.

Here are some of fees and charges that can increase your firm’s costs on bank loans:

Commitment fees

Many banks charge commitment fees of ½% - 1% or more to issue a commitment to lend money. The fee is calculated on available credit amount. Commitment fees significantly increase effective rate on outstanding loans.

These fees can be negotiated. If your firm has a strong credit profile or if competition among banks in your area is fierce, ask for a lower commitment fee or ask to have it waived.

Non-use fees

These fees may be charged in lieu of or in addition to commitment fees. Non-use fees usually range from ¼% to ½% of unused credit facility. Although these fees are less onerous than commitment fees, they also increase effective borrowing rate.

As with a commitment fee, you may be able to get non-use fee reduced or waived if your firm has a strong credit profile or if banking environment is very competitive.

Restructuring fees

When your firm has reason to restructure an existing loan, you can expect your bank to charge a restructuring fee for privilege. For example, if your company has reason to convert a short-term loan into a long-term one, it will probably be charged for this restructure.

These fees can range from ½% to 2% or more plus any bank legal fees or out-of-pocket expenses. If your firm has been a long-term bank customer in good standing, you may be able to negotiate or eliminate fee. But don’t expect to eliminate bank’s attorney fees and out-of-pocket expenses.

Bank attorney fees

Attorney fees usually come into play when bank uses an outside law firm. Making matters worst, many outside bank attorneys require a borrower to hire an outside attorney to issue an opinion letter covering transaction.

Usually, only strongest borrowers in very competitive banking situations can totally eliminate paying bank attorney fees. However, if your firm is a valued customer, your bank may be willing to have these fees capped or reduced. Often banks have some leverage with their law firms to get a discount.

Appraisal/environmental evaluation fees

These fees are charged on many asset-backed loans. They usually involve bringing in an outside expert to evaluate equipment or real estate. These fees can be significant, depending on type of appraisal or environment issue.