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Getting a loan for your company can be a good way to cover unexpected expenses and cash shortfalls or to invest in your business to accelerate its growth. But business loans come at a cost: You have to pay interest and fees when you borrow money.
Understanding common business loan fees and how to avoid or minimize them can help you save money on your loans.
What are small business loan fees?
With small business loans, you have to pay interest based on the amount of money you borrow, but many loans also come with fees.
These fees are additional amounts that you have to pay the lender either upfront or over the life of the loan. The type of fee and amount charged will vary by lender, so you’ll have to shop around and compare offers from multiple lenders. This is especially true if you have poor credit since lenders tend to charge higher rates and fees to risky borrowers.
Common business loan fees
Business lenders can charge a variety of fees. Some fees are more common than others. These are some of the fees you should be on the lookout for.
An administrative fee is a generic fee that isn’t very specific about what it covers. Lenders charge these fees to pay for various administrative and paperwork costs related to receiving your loan application, reviewing it and disbursing funds.
Annual fees are regular charges you pay each year that you have a loan. They’re common on things like lines of credit or business credit cards, which are revolving lines of credit that let you draw funds multiple times.
Annual fees typically range from $50 to a few hundred dollars.
An application fee is an upfront fee lenders charge when you submit your application. The fee covers the cost of reviewing your application and making a lending decision.
The best business loans won’t charge an application fee. In general, try to avoid these fees because you could wind up paying the fee only to get denied.
If you’re getting a secured business loan, especially one secured by a piece of real estate, the lender may want to hire an appraiser to determine the value of that collateral to make sure it’s sufficient to secure the loan.
An appraisal for real estate will usually cost about $400.
Common types of business collateral used to secure a loan include:
- Real estate
- Business equipment
Closing costs are common for real estate loans. You pay them when you sign the final loan paperwork, and they usually include many other fees, such as appraisal fees, attorney fees, credit check fees, and other related costs.
Collection and overdue fees
If you default on your business loan by missing a payment or multiple payments, the lender will charge you a fee to cover the cost of trying to collect the money it is owed. The fee is often a percentage of the amount owed.
Credit check fee
A credit check fee covers the expense of requesting a copy of your credit report from one of the credit bureaus. The fee is usually between $25 and $75.
Credit report fee
A credit report fee is another name for a credit check fee. It pays for the cost of getting a copy of your credit report.
A draw fee may be charged each time you take money out of an account. It’s a common business line of credit cost charged by online lenders, and the fee is typically a percentage of the amount drawn, such as 1 percent or 2 percent.
Late payment fee
Lenders assess a late payment fee when you make a payment after its due date. The fee is usually a flat amount, around $30 or $40.
Non-sufficient funds fee
If you try to make a payment by check or bank transfer, only to find that you don’t have enough money to cover the payment, your lender could charge a non-sufficient funds (NSF) fee. Your bank might also charge a similar fee or overdraft fee.
Typically, the fee is a flat amount of around $30 or $40.
Origination fees are upfront charges that cover the cost of reviewing your application and funding your loan. Sometimes, the lender may call them administrative fees.
Origination fees are usually a percentage of the borrowed amount, about 2 percent to 5 percent. You can either reduce the amount of money you receive or increase your loan’s starting balance to pay the fee.
For example, if you get a $10,000 loan with a 2% origination fee, you will receive either $9,800 or get $10,000 but have a starting loan balance of $10,200.
A prepayment penalty is a fee you must pay if you pay your loan off ahead of schedule. Not every lender charges this fee, and you won’t have to pay it if you follow the loan’s minimum payment schedule.
Typically, this fee is a percentage of the amount paid early. Before paying off your loan, compare the interest savings of early repayment to the cost of the penalty fee.
SBA 7(a) guarantee fee
The Small Business Administration offers insurance to lenders through the SBA loan program, reducing the lender’s risk. But that insurance comes at a cost and lenders pass that cost on to borrowers.
The amount you pay depends on the size and term of the loan.
|Amount borrowed||Amount guaranteed by the SBA||Fee for loans 12 months or less||Fee for loans more than 12 months|
|$0 to $150,000||85%||None||None|
|$150,001 to $500,000||75%||None||None|
|$500,001 to $700,000||75%||0.25% of the guaranteed amount||0.55% of the guaranteed amount|
|$700,001 to $1 million||75%||0.25% of the guaranteed amount||1.05% of the guaranteed amount|
|$1 million+||75% up to $3.75 million||0.25% of the guaranteed amount||3.5% of the guaranteed amount up to $1 million, plus 3.75% of any guaranteed amount over $1 million|
An underwriting fee is a charge that covers the amount the lender spent on reviewing your application and preparing loan documents. It’s often a percentage of the loan amount and is common for real estate loans.
Unused line fee
On top of business line of credit rates and draw fees, a lender may also charge a monthly fee based on the amount of your line of credit that you have not used. This is typically a small percentage.
For example, if you have a $100,000 line of credit with a $20,000 balance, you have $80,000 in unused credit. If the fee is 0.1%, you’ll pay an unused line fee of $80.
Small business loans come at a price, but you don’t have to accept every fee a lender throws at you. Understand what the common fees are and negotiate with your lender to try to avoid them or get them reduced. Also be sure to take the time to shop around and compare loan offers to find the lender with the lowest fees.
Frequently asked questions
Origination fees can vary from 0.5 percent to as much as 8 percent depending on the lender you’re working with and your credit score. Business owners that don’t need fast business loans and have good credit may not pay any origination fee. But businesses that need a bad credit business loan or quick cash might pay the maximum rate.
SBA loans don’t have traditional origination fees but may have upfront charges such as SBA loan guarantee fees.
A documentation fee or loan document fee is a charge for preparing loan paperwork and other documents. It’s usually about $50 to $100.