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The Most Common Business Loan Fees: Extra Costs to Watch Out For
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You know how they say you should always read the small print? Well, when it comes to business financing, that’s great advice.
Many, if not most, business loans come with fees above and beyond the interest you’re paying. And if you don’t expect those fees, they can be a nasty shock when they appear. (After all, even a 1% fee on a $100,000 loan is an extra $1,000!)
So as you choose your business financing, you should look out for extra fees and costs. This guide will walk you through common business loan fees and explain how they work so you know exactly what to look for.
Types of business loan fees
Many factors can affect what kinds of loan fees you pay and how much they cost. The type of loan you get matters, as does your lender and loan amount. Even your credit history can play a role.
Some lenders may have their own unique fees, but these are the most common business loan fees.
Most lenders take fees out of your total loan amount. So if you’re approved for a $50,000 loan but charged $1,000 in fees, you’ll end up getting $49,000. So if you want to be a savvy borrower, you should plan accordingly.
Annual fees (lines of credit): Some lenders charge an annual fee to keep your business line of credit open and active.
Application fee: Lenders sometimes charge a fee for processing your loan application. Put simply, you get charged just for applying. Luckily, these fees don’t seem to be the status quo for business lenders. We rarely see banks or online lenders charge application fees.
Closing costs: Just like personal mortgages, many commercial mortgages, and other commercial real estate loans come with closing costs. These can include appraisal fees, attorney fees, credit report fees, recording fees, and more.
Late payment fee: This one’s simple. If you’re late making a payment on your business loan, your lender might charge you a fee. Some lenders charge a fixed late fee, but many charge a percentage of the missed payment. The vast majority of business loans include late payment fees.
Non-sufficient funds (NSF) fee: This is another standard payment-related fee. If a lender tries to collect a business loan payment (either through an automated transfer or accepting your manual payment) but you don't have enough funds in the associated bank account, you might get charged an NSF fee―and you’ll still be responsible for the usual payment too.
Origination fee: Many lenders charge an origination fee when you take out a business loan. All sorts of lender costs can get rolled into this fee, from underwriting costs to funding costs. Origination fees are usually calculated as a percentage of the total loan amount, with many falling in the 0.5% to 2% range.
Packaging fee: A packaging fee works much like an origination fee, in that it’s meant to cover various lender costs. On SBA loans (loans backed by the U.S. Small Business Administration), the rules say that lenders can charge packaging fees (but not origination fees).
Banks often have lower interest rates than online lenders. But you can find the fees on this list at both traditional and alternative lenders.
Prepayment penalty: You might think lenders would want you to pay back your business loans ASAP. But they can actually lose out on a lot of interest money with early repayment, especially on longer repayment terms. For that reason, some lenders charge prepayment penalties―extra fees for paying your loan balance early. This fee is usually found in the fine print, so it’s a good one to ask your lender about.
Referral fee: Some lending marketplaces charge this fee. Think of it as a convenience fee for referring your application to an appropriate lender and helping you get funded.
SBA loan guarantee fee: When you get an SBA loan from a lender, the SBA promises that your lender will get the guaranteed portion of the loan (75% to 85%) back, even if you default on the loan. This guarantee is partly why interest rates on SBA loans can be so low. But the SBA charges you a 2% to 3.75% fee as part of this guarantee.
Underwriting fee: When a lender underwrites your loan, they carry out a bunch of analyses to determine whether you should get approved for a loan and what interest rate you should get. While it sometimes gets grouped under other fees, the underwriting fee specifically covers the lender’s time and expenses associated with this underwriting process.
Wire transfer fee: If you get approved for funding and opt to get your money through wire transfer (which can be faster than ACH transfers), you might get charged a fee for the service.
Fees and APR
Many of the fees above get folded into a loan’s annual percentage rate, or APR. So when you compare the APR on your loan financing options, you can easily see if you’re paying a lot of fees in addition to interest.
While APR often looks just like interest (both are expressed as percentages, and the interest rate and the APR on a loan can be pretty close), the number includes both interest and fees. So it’s basically how much you can expect to pay in interest rates and fees over the course of one year.
For that reason, short-term business loans often have very high APRs, even if the interest rates themselves aren’t that high. That's because you don’t get the cost of all the loan fees spread over many years—you have to pay the fees on short-term loans all in one year (or maybe a little more or less, depending on your loan term).
A term loan with the same interest rate but a longer-term (maybe 5 to 10 years) will have a lower APR because the fees get spread out over several years. (On the other hand, you often pay more in interest with long-term financing.)
Fees are, unfortunately, a part of business financing―whether you go with traditional bank loans or online business loans.
But even if you can’t avoid loan fees, you can figure out what they are so you know what to expect. That way, at least you’ll have no surprises.
Now that you know more about what business loan fees to expect, do the math on your total loan costs with our business loan calculator.
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