AFTER RACKING UP NEARLY $900,000 on a revolving line of credit to acquire other businesses for his $9 million commercial and industrial fire-protection company, John Lawlor felt burdened by mounting interest costs--the result of using a financing instrument better suited for short-range capital needs. "When everything slowed down because of 9/11 and other impacts to the economy, those acquisitions were not paying for themselves as robustly [as anticipated]," recalls Lawlor, president of Keystone Protection Industries in Montgomeryville, Pennsylvania.

The solution was obvious: Refinance to rein in runaway interest costs. So Lawlor secured a less expensive form of financing--a fixed-rate term loan--for two-thirds of his outstanding debt, and a new line of credit for the rest. "It wasn't additional money being requested," he explains. "It was the same figure that had been approved years before."

Even so, his bank charged a $5,000 origination fee for the term loan and another $2,500 to establish the credit line. "That's $7,500 just for the privilege of having the bank restructure the loan," stresses Lawlor, 40. "There's a presumed savings in interest expenses each month. But now that you have to offset that with the $7,500 [fee] the bank picks up on the origination of the recasted loan, did I really save anything?"

Sticker Shock

As Lawlor's recent financing experience illustrates, even seasoned borrowers are often caught off guard by higher-than-expected loan costs. While it is common for commercial lenders to tack on extra fees for such things as preparing loan documents, those costs are frequently only the tip of the iceberg. Indeed, lenders charge points, or prepaid interest (often called origination or commitment fees), for holding the credit available, and in some instances, ongoing service fees.

What's more, if the lender requires additional documentation, such as appraisals and environmental reports, or if an attorney is required to close the loan, the borrower picks up those costs as well. As a result, it's possible for a particularly complicated real estate transaction to boost loan costs by thousands of dollars. "If we're doing an environmental assessment, and [it] comes back that there has been potential of a past environmental problem on the property, both the timeline and the cost are just open-ended," says William Galloway, senior vice president of Hibernia National Bank in Metairie, Louisiana. Though the typical appraisal costs $1,000 to $2,000, "I've seen them run as low as $300 to as high as $17,000," he reveals.

Borrowers, however, can guard against escalating loan costs by asking their lenders to cap both legal fees and the amount paid for any third-party reports, such as the sometimes pricey environmental review. "It protects you from surprises down the road, when all of a sudden the deal becomes more complicated because there's a title issue or a survey issue, and it pumps the lender's counsel fees way up," says Peter Smith, an attorney at Semanoff, Ormsby, Greenberg & Torchia LLC in Jenkintown, Pennsylvania. He says in some cases, lenders can acquire discounted rates from third-party professionals because of the large volume of business they conduct with them. Because third-party fees vary based on the deal's complexity, an attorney or another advisor can help determine the appropriate fee cap for your particular transaction. In general, lenders are often responsive to these sorts of requests, according to Smith.

Timing Is Everything

A successful fee negotiation, however, hinges largely on its timing. Not surprisingly, you lose leverage by prematurely signing the commitment letter outlining the lender's terms and conditions. But bear in mind that a borrower coming from a position of financial strength has more bargaining power than one struggling for fiscal footing. In Lawlor's case, only his longtime banker would give serious consideration to his credit request, which greatly diminished his ability to negotiate. "We were not the sweethearts of all the other bankers," says Lawlor, who met with several lenders to gauge his credit prospects. Most said his company, which had experienced "two very flat years," needed to boost profits before they would extend funds. "One guy was even candid enough to say, 'We would be getting rid of customers with this kind of profile,'" Lawlor remembers. As for his bank, "they probably knew there weren't going to be 10 other banks that were going to scoop me away."

But if you are in a position to deal, you can negotiate a number of things at the commitment-letter stage, from eliminating the often costly "opinion of counsel" conducted by the lender's attorney, to getting rid of the commitment fee altogether, says attorney Charles Ormsby Jr., who's also Smith's colleague. Even if the creditor refuses to waive the commitment charge, it might not collect the fee until closing, which is beneficial from a cash-flow standpoint.