Business loans help grow your business. Companies can use business loans for purchasing equipment, inventory and commercial real estate. You can also secure a loan to buy another business. But loans aren’t free money.

When choosing a loan, it’s important to read the fine print so you have a clear understanding of the total cost of a business loan. Understanding each charge, from interest to fees, may help you negotiate costs or avoid a bad deal.

Interest

Simply, the interest rate is the price you pay to borrow money. It’s expressed as a percentage of the amount you are borrowing. For some loans, it might be presented as a factor rate in decimal form.

The exact rate depends on many factors, including the current federal funds rate, the type of loan, your collateral and your personal and business credit history. Rates range from single digits to 60 percent or more. Companies with a good credit history are more likely to get a lower interest rate than companies with bad credit.

Many people are quoted an annual percentage rate when applying for a loan. The APR is also quoted as a percentage. But, in addition to the interest amount, the APR factors in other fees that make up your payment. While you may have an interest rate of 5 percent, for example, your total APR could be 5.25 percent, meaning you’re paying an additional quarter percentage point in fees.

Fees

In addition to the interest rate, you want to review the other possible business loan fees you may be charged to secure your business loan. Some fees and costs may be negotiable. If a fee seems excessive, or if another lender you’ve prequalified with doesn’t charge it, talk to the lender about reducing or eliminating the fee before finalizing your loan agreement.

Closing costs

Like a home mortgage, business loan fees may include closing costs. This is usually a dollar amount and encompasses a number of other costs: Appraisals, attorney fees, payments to credit bureaus, recording fees and other services the bank may have had to pay to finalize your loan. 

This can be added to the monthly payment or paid in full upon closing.

Down payment

Depending on the type of loan you secure, you may be required to make a down payment. The amount is typically between 10 percent and 30 percent of the funded amount. 

This immediate out-of-pocket cost should be factored into your decision on which loan to take out.

Guarantee fee

If you’re getting your business loan through the U.S. Small Business Administration, you may be charged a guarantee fee. This is because the SBA guarantees to your lender a certain amount of the principal will be paid back, even if you default on the loan. This is charged as a percentage of the guaranteed amount and can be between 0.25 and 3.5 percent.

Late payment fees

If you fail to make your loan payment either on time or within the lender’s grace period, your business may incur late fees. This fee is a set dollar amount or percentage — commonly about 5 percent — and would apply for every month you’re late on the payment. The fee is added to the total amount due in the following month.

Lines of credit fees

In addition to the charges associated with a traditional business loan, a business line of credit may have two additional fees to consider. The first is an annual maintenance fee, which the bank may charge to keep your line of credit open and available to you. It’s typically between $75 and $300.

The second is a draw fee. You may be charged this fee each time you withdraw funds from your line of credit.

Non-sufficient funds (NSF) fee

If you’ve set up automatic payment and there’s not enough money in your commercial banking account to cover your loan payment, the lender may charge a non-sufficient funds fee. Like a late payment fee, this is a set amount or percentage that’s added to your next payment.

Origination fee/application fee/processing fee

The origination fee is an upfront amount charged by your financial institution to process your business loan application. Some lenders may refer to this as an application fee or processing fee. It is charged as a percentage of the total amount borrowed. It can be paid in full at closing or rolled into monthly payments. However, not all lenders charge an origination fee.

Packaging fee

Instead of origination fees, U.S. Small Business Administration partner lenders may charge a packaging fee on SBA loans. It is a similar charge, made payable to the lender for organizing and processing your business loan application.

Prepayment penalty

If you pay off a loan early, before the end of the term, you may be subject to a prepayment penalty. It is typically charged as a percentage of the outstanding loan balance. So, before paying off a loan early, you want to compare the savings you’ll receive by not making the continued interest payments to the penalty you may incur by paying the balance off early. 

Not all business loans have prepayment penalties, so you want to be sure your read the terms of your agreement to see if a penalty applies to your loan. 

Underwriting fee

After your loan application, lenders will evaluate your creditworthiness and verify the information you provided on the application. They may charge an underwriting fee for this work, which can either be a flat fee or a percentage of the total loan.

Wire transfer fee

Once you’re approved for your business loan, you can either receive the funds electronically through an Automated Clearing House (ACH) payment or wire transfer. If you choose a wire transfer, you’ll be charged a flat fee. Domestic wire transfer fees are typically between $15 and $30.

The bottom line

The cost of a business loan varies widely, depending on the type of loan you take out, your lender, the creditworthiness of your company and the additional fees you may be charged. 

When comparing loans, you want to review more than just the interest rate or APR. It’s imperative to read the fine print and have your lender explain each fee associated with your loan so you can evaluate the total cost of a business loan.